A person who opts out of a workplace pension during their working career may wish they hadn’t when they reach retirement age.

report commissioned by Royal London highlights the impact of opting out of a workplace pension, using an example of a cash-strapped couple aged 30 with children and a large mortgage, and with a combined income of £35,000.

The model examines what would happen if the couple opt out of auto-enrolment when employee contributions rise to 5 per cent in April 2019, and they remain opted out until age 55 when their mortgage is paid off and their children are grown up.

Their retirement income will be 24 per cent lower than if they had remained enrolled in the pension scheme.

The couple will have a projected combined state pension of £16,000, supplemented by pension income of £9,700 if they had remained enrolled. This extra income falls to just £3,000 per year if they opt out between the ages of 30 and 55. However, they only see an extra 3 per cent of their salary, as some of the gain from no longer making contributions to the workplace pension scheme would be offset by an increase in tax and National Insurance contributions.

Even where the couple continue with the minimum auto-enrolment pension contributions, they would have to work full-time for a further five years to achieve the £32,000 they will need to maintain their pre-retirement spending habits.

Alternatively, if they were to increase their pension contributions from 5 per cent to 11.5 per cent, they could eliminate the need to work longer than expected. This works out at an increase in extra pension contributions of 1.3 per cent of salary for each year less having to work.

The example illustrates how choices made during a working life can profoundly affect the quality of life in retirement. Regularly reviewing workplace pension contributions and increasing them ‘little and often’ can be a far better strategy than hoping to make up for a lifetime of under-saving close to retirement.

The report also illustrates need for good advice and guidance before making financial decisions during a working life.

If you wish to discuss this area in more detail, then please contact Bishop Fleming Independent Financial Advisers Ltd who are authorised and regulated by the Financial Conduct Authority.


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