Auto enrolment: beware the false economy of opting out

25 April 2018

From 6th April, the rules around auto enrolment contributions to workplace pensions changed. Where previously, total contributions were set at 2% of salary, with 1% each coming from employer and employee, they now stand at 5%, with at least 2% of that coming from an employer. This means many employees may find their contributions have tripled this month from 1% to 3%. While this requirement came in at the beginning of the month, it is only with the looming payday that people will feel the pinch.

With many people potentially feeling they can’t afford the contribution increases, Andy James, head of retirement planning at Tilney, looks at the pros and cons of opting out of a scheme.

“From this month’s payday, those in an auto enrolment workplace pension scheme will notice the contributions increase up to threefold. In this era when wage growth is still dragging behind inflation, this may feel like quite a pinch and it is understandable that people do not want to lose more of their disposable income each month. Some employees will already be paying more than the minimum contribution so will not notice this hike so severely. But for those who don’t feel like they can afford it, opting out of their scheme altogether may seem like the only option.

“If people do choose to opt out of their auto-enrolled pension scheme, they need to seriously think about how this may affect their retirement. The money you save earliest in your career is the money that works hardest for you throughout your life, until retirement. Choosing not to contribute any more to your pension means you will be starting from a much smaller pension base when you retire and there is a good chance you will not have enough to fund the lifestyle you want.

“There are obviously many other vehicles people can use to save, and they may choose to put 1% into an ISA or if they are under 50 a Lifetime ISA every month if that is all they can afford. While it is obviously a good thing to still be saving, they will be missing out on employer contributions too. So only saving 1% a month to try and save that extra 2% is actually a completely false economy as you will be missing out on an additional 2% from your employer.

“For those who are really struggling, it is always worth speaking to your employer. If an employer agrees to pay more than 2%, the individual’s contributions will decrease accordingly. The government is not actually going to want a generation with no pension as that is very bad news for the economy. They may have underestimated how this would affect workers, or they may be relying on people’s apathy where they just ‘can’t be bothered’ to change their scheme.

“The most important thing for people to do over the coming months is to get their finances in order and truly understand how these increases will affect them going forward. Because come next April, there will be another hike when employees will need to pay up to 5%, and we all need to ensure we are ready for it.”

About Tilney

Tilney is a leading investment and financial planning group that builds on a heritage of more than 180 years.  Our clients are private investors, charities and professional intermediaries who trust us with over £23 billion of their assets. We offer a range of services including financial planning, investment management and advice and, through our Bestinvest service, a leading online platform for those who prefer to manage their own investments.

We have won numerous awards. Tilney has been awarded Best Conventional Advisory Service at the 2018 City of London Wealth Management Awards, Best Advisory Service in the 2015 City of London Wealth Management Awards; Investment Award – Cautious category in the Private Asset Management Awards; and Stockbroker of the Year, Execution-only Stockbroker of the Year and Self-select ISA Provider of the Year 2015, as voted by readers of the Financial Times and Investors Chronicle. Bestinvest was voted Best SIPP Provider and Best Fund Platform at the 2017 City of London Wealth Management Awards, Best Direct SIPP Provider at the Awards 2017, Best Stocks & Shares ISA Provider at the 2017 Shares Awards, as well as Best Self Select ISA Provider, Best Online/Execution-only Stockbroker and Best Investment Platform 2017 at the FT and Investors Chronicle Investment and Wealth Management Awards, as voted by readers of the FT and Investors Chronicle.

Headquartered in Mayfair, London, the Tilney Group employs over 1,000 staff across our network of 30 offices, enabling us to support clients with a local service throughout the UK.