Opting out of a pension can seem like a logical choice when immediate financial pressures take priority. We see it happen often: it’s sometimes hard to prioritise your retirement fund when you need the funds today. Many people make this decision because they’re struggling to cover everyday expenses, find pensions too complex or inaccessible, or believe they can simply catch up on contributions later.
While these concerns are valid and help provide some financial relief in the short-term, opting out can have long-term financial consequences, and few have a full view on what they’re actually missing out on.
In this blog, we’ll explore the pros and cons of opting out of your pension and help clarify why staying enrolled can be so valuable – empowering you to make an informed decision.
Table of contents
What do you lose by opting out of your pension?
There are significant benefits of participating in a workplace pension. When you opt out, you’re not only compromising your immediate pension growth, but also forfeiting these benefits:
- Employer contributions: Many employers match or top up your contributions, effectively giving you “free money”. By opting out, you lose this valuable boost to your retirement savings.
- Tax relief: Pension contributions often come with tax advantages, whether through salary sacrifice schemes or government tax relief. Skipping your pension means missing out on this instant saving.
- Compound growth: Time is your greatest ally in pension savings. The earlier you contribute, the more your money can grow through compound interest, significantly increasing your retirement fund over the long term.
Opting out for even a few years can cost you thousands in missed growth by the time you retirement!
The biggest pension myths
There are plenty of misconceptions about pensions that can make people consider opting out. Take a look at these common myths – they might help clear up any doubts and give you a clearer picture of your retirement options.
Myth 1: “I can’t afford to save for a pension right now”
Even small contributions grow over time. Reducing your contributions, rather than opting out, allows you to retain employer contributions and tax relief.
Myth 2: “I have lots of time to save”
Delaying contributions can have a massive impact. For instance, saving £100 per month from age 25 vs. starting at 35 could result in tens of thousands of pounds more by retirement.
Myth 3: “It’s too late to make an impact”
It might sound cliche but it’s never too late to start! Any money invested now before you decide to retire is a worthwhile investment. It’s also important to remember that money you put in a workplace or private pension scheme gets tax benefits from the government, so you will benefit in that way too.
Myth 4: “I don’t plan to retire”
Even if retirement seems distant or irrelevant, pensions provide a safety net for the future, allowing for financial independence. You may not want to retire but you need to plan for it in case you are forced to because of health and other circumstances beyond your control.
Myth 5: “The state pension will take care of my retirement”
The suggested annual income required for a moderate level of lifestyle in retirement is estimated at over £30,000 a year. By relying on state pension, you will most likely come up short as those qualifying for the full state pension only receive around £12,000 per year, falling short of even the recommended minimum to cover basic living expenses.
Myth 6: “I am retiring outside of the UK so I don’t need a pension”
Opting out of your UK pension because you plan to retire abroad could lead to missed opportunities for financial security. UK pensions often come with significant tax relief when contributing, which can still benefit you regardless of where you retire. It’s advisable to consult with a financial advisor to understand the best approach for managing your pension in the context of international retirement.
Myth 7: “My pension pot will be lost if I change jobs”
This is a common misunderstanding. Your pension savings remain yours, even if you switch employers. You can leave the funds where they are, transfer them to a new scheme, or consolidate them into one pot. Changing jobs doesn’t mean starting over, it’s simply a new chapter in your pension journey.
How to manage financial pressures without opting out?
If you’re considering opting out of your pension because of financial pressures, there are alternatives that can provide relief and clarity. These options allow you to manage your finances today without compromising your retirement savings.
- Review your budget: Start by identifying unnecessary expenses or ways to save on the essentials. Free budgeting apps can help you take control of where every £ goes each month.
- Reduce contributions temporarily: Lowering your pension contributions to the minimum required to keep employer contributions ensures your pot continues to grow while freeing up extra cash. Use this as a short-term solution to keep your retirement savings on track.
- Speak to your employer: See if your workplace offers salary sacrifice schemes, childcare support, or other benefits that can ease financial stress.
- Consolidate or reduce debt: Managing high-interest debts can free up income to maintain your pension contributions.
- Seek financial guidance: Access resources like financial coaching or debt advice to create a plan that works for you.
The hidden impact of pension opt out
Research shows 82% of savers don’t know how much they’ll need in retirement. Finding these numbers can seem overwhelming, this example will help illustrate the real impact of opting out and guide you in making informed decisions about your future savings.
Example person:
- Salary: £30,000
- In a pension salary exchange scheme
1. How contributions work:
| Amount per year | Notes | |
|---|---|---|
| Employee contributions | £1,500 | 5% of £30,000 |
| Employer contributions | £900 | 3% of £30,000 |
| Total contributions | £2,400 | Employee + Employer |
| Income tax relief | £300 | Reduces employee cost |
| NI saving via salary exchange | £120 | Reduces employee cost further |
| Net cost to employee | £1,080 | £1,500 – £300 – £120 |
Key takeaway:
- Real cost to employee: £1,500 – £300 – £120 = £1,080 per year
- Total going into pension: £1,500 + £900 = £2,400 per year i.e. it’s equivalent to saving £1 and getting £1 free!
2. The impact of taking a break:
Let’s see the long-term impact of skipping even a single year.
| # years saving | Pension pot size |
|---|---|
| Saving for 40 years from age 25 to 65 at £2,400 per year | £474K pension pot |
| Skip 1 year (start at 26) | £443K (£31K less!) |
| Skip 2 years (start at 27) | £414K (£60K less!) |
| Skip 3 years (start at 28) | £387K (£87K less!) |
Assumptions: £30K starting salary, 2.5% annual salary growth, 6% investment growth, 0.50% annual charges.
3. Comparing the power of compounding:
Now that we’ve looked at the numbers without factoring in compound interest, let’s explore how compounding can truly drive your pension growth.
| # years saving | Pension pot size |
|---|---|
| Saving for 40 years from age 25 to 65. Starting with £2400 per year and rising with a rising salary. | £474K pension pot |
| Broken down in time periods (Total contributions + investment growth – charges) | |
| Pension pot at 10 years: £27K + £9K – £1K | £35K |
| Pension pot at 20 years: £61K + £47K – £4K | £104K |
| Pension pot at 30 years: £105K + £143K – £13K | £235K |
| Pension pot at 40 years: £161K + £343K – £30K | £474K |
Key takeaways:
- Pension pot after 40 years without compounding interest: £131K
- Pension pot after 40 years with compounding interest: £474K
- “Free” money was half of total contributions: £161K consisted of £80.5K from the employer and tax relief
- From 20 years onwards, the annual investment growth was higher than the total contributions being added
Tools you need to stay on track
Staying on top of your pension and overall financial wellbeing can be overwhelming, but the right tools can make it simple. Platforms like Maji, a comprehensive financial wellbeing solution, allow you to manage everything in one place, helping you stay on track with your long-term goals.
With Maji, you can:
- Complete a financial health check to identify gaps or opportunities in your finances
- Create and monitor a budget to see exactly where your money goes each month
- Build a personalised financial plan that aligns with your short- and long-term goals
- Access expert guidance from financial coaches or advisors whenever you need support
By bringing all these resources together, you can confidently manage your finances today while keeping your retirement savings growing for the future. If you don’t have access to Maji, there are a few options to explore. You could share this with your employer to ask about financial wellbeing tools or support that may be available to you as an employee benefit.
