Why Are People Opting Out Of Their Pension Contributions?

In recent months, some finfluencers (that’s financial influencers for the uninitiated) have been recommending their followers opt out of their workplace pension contributions. In fact, 50 percent of working 18 to 24 year olds have already opted out. Is it a good idea? We asked the experts at Rathbones for the verdict. But first, why are people recommending this at all?

Why Are People Opting Out Of Their Pension Contributions?

Everyone wants to save money, and finfluencers often boast a treasure trove of money-saving hacks, from limited-time discounts to lucrative deals for opening bank accounts to cost-saving techniques you might not have considered. And here’s one you probably haven’t considered at all: opting out of your pension contributions.

Why is this being suggested, and why are young people especially vulnerable? Because a flurry of social media users – self-described finfluencers, content creators who don’t usually talk about finance, and floods of people in the comments – are prioritising wanting money now rather than saving it for later. This is tempting amid skyrocketing grocery prices, soaring rent and a pension age inching ever higher, but it’s not a well-informed idea…

Here’s Why Opting Out Of Your Pension Is A Bad Idea

‘Although it can be tempting to skip pension contributions in favour of having money to use now (especially with the rising cost of living), opting out of pension contributions can have a significant negative impact on your future financial security,’ says Malvee Vaja, a financial adviser at Rathbones. ‘Stopping contributions for even one year can result in £26,081 less in your pension fund at retirement when investing over a 20 year period (£1,000 per month at a real return of 4 percent). This is because compounding makes a big difference to your investments and skipping contributions will slow this down.

‘Around one in four people have opted out of their workplace pension at some point, and this figure is higher among 18 to 24 year olds (one in two),’ Malvee adds. ‘By law, if you are eligible, you and your employer must pay a minimum amount into your pension scheme; this is set at 3 percent for employers and 5 percent for employees and by opting out, you may be turning down “free money”.

‘In some cases, employer pension schemes are more generous and will match higher employee contributions with enhanced employer contributions, as well as offering the option of “salary sacrifice”, which can mean lower income tax and national insurance,’ Malvee says.