Employees who opt out of their workplace pension scheme, to help them cope with the cost-of-living crisis risk losing employer contributions and tax relief, which may be more than the short-term savings they are making.
Pension consultancy Broadstone says its new figures show how this ‘hidden trap’ could leave many struggling families poorer in the long term.
Its modelling shows that someone on a £35,000 salary, with a 5 per cent matched scheme, would ordinarily have £291.66 going into their pension each month. This figures includes employer contributions as well as tax relief.
If they decide to opt-out, they would reduce their employee contributions by £145.83 each month. However they would not see their take home pay increase by this amount: loss of tax-relief means that they would only add £116.66 to their monthly salary.
Moreover, losing the employer contributions means their total monthly pension contribution falls to zero, meaning a total loss to their overall wealth of £175 every month.
Broadstone head of pensions and savings Rachel Meadows says: “For some people, taking the decision to reduce or stop their pension contributions will be necessary as income pressures intensify.
“However, pension savers should be aware that there are traps and consequences due to considerable employer and government incentives around pension saving. It is not as simple as recouping the pension outgoings on their pay-slip pound-for-pound into their salary.”
Reducing AE payments, rather than opting out completely may ensure that employees still receive contributions from employers and will also get tax relief on these payments.
Those that opt out will not be automatically enrolled back into their workplace pension for three years. But if people’s financial situation does improve there is the option to move back into the pension scheme, before this happens automatically.
