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Workers weigh pension opt-out as contributions set to rise

Survey by insurer Aviva shows more than one in 10 savers are thinking of opting out of workplace pensions rather than paying higher contributions.

Workers weigh pension opt-out as contributions set to rise

Around 12% of workers are thinking of opting out of their workplace pension when minimum contributions rise next April, according to insurer Aviva. However, the majority look set to stay put.

Reported in The Daily Telegraph, research by insurer Aviva of 2,007 private sector workers found that 4% of people had already decided they would opt out of their workplace pension next year, while 50% said they planned to stay enrolled.

As it stands, minimum auto-enrolment contributions are 2% (split equally between employee and employer). Next April it will rise to an employer minimum of 2% and employee minimum contribution of 3%; 5% in total. Then in 2019 it will rise again to 8% in total; 3% from the employer and 5% from employee.

Aviva has already called for the government to raise the minimum contribution much higher, to 12.5% by 2028.

Research carried out by Citywire earlier this year showed an 8% total contribution would still leave savers short of a £200,000-plus pot by retirement. Previous pensions minister, Richard Harrington said £200,000 was about the amount people should be aiming to save by retirement.

The average salary in the UK is just under £27,000, according to the Office for National Statistics, and Harrington assumed people wanted to retire on two-thirds of their salary.

With the new state pension of around £8,000 per year, there would be a £10,000 per year gap to make up annual retirement incomes of £18,000.

Auto-enrolment was introduced in 2012, since when over 8.5 million people have joined a workplace scheme.

The policy has so far been viewed as a resounding success, turning around free-falling participation rates to a point where the vast majority now save into some form of workplace pension.

Recently the economist, Richard Thaler, whose nudge theory inspired auto-enrolment, was awarded a Nobel prize.

However, a review of the policy is underway and new challenges have emerged over the years since auto-enrolment was launched.

Earnings have not risen as quickly as had been anticipated when auto-enrolment was given the green light in 2010, and the intervening years have also seen the rise of the so-called 'gig economy'.

Writing in The Times, Paul Johnson, director for the Institute of Fiscal Studies, said in 2010 earnings were expected to soon recover to pre-recession levels, but instead ‘that has failed to happen to a spectacular degree’.

He said: ‘What is worrying for government is that earnings are again rising less quickly than prices, while automatic contribution rates are due to rise… Whether present coverage rates of 90% or so will survive these increases remains to be seen. If they do, one consequence will be an even bigger squeeze on earnings and on take-home pay. The power of inertia could see income, consumption and living standards suffer more than was ever envisaged by the architects of the scheme’.

4 comments so far. Why not have your say?

Law Man

Dec 11, 2017 at 16:20

While the mandatory employer contribution is too low, why should anyone opt out of free money?

On what do these people think they will live in old age? I hope not state benefits.

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Dec 12, 2017 at 12:34

I opted out because the provider takes 2% of all contributions. I can invest myself and if I need to open a SIPP I will do that instead

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Law Man

Dec 12, 2017 at 15:17

Rishan: a management charge of 1.8% is outrageous. I could not find definitive answers, but found references to the maximum allowable fund charge being 0.75%, with charges often being less e.g. Aviva mentions 0.3%.

You make a valid point, and it is worth checking.

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Dec 12, 2017 at 15:34

I know, Law Man, I was absolutely furious to discover that. 0.3% looks about right for the fund options I was given, but the other charge is an absolute scandal. You make a good point too though and it reminds me to check if there are other, better value workplace schemes my employer could use

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