Opting out - Why you should stay in your workplace pension


For many people, paying into a workplace pension is a good idea, even if you have other financial commitments, such as a mortgage or loan. However, the cost-of-living crisis has caused many individuals and their families to review and prioritise their outgoings, which may also have led to them thinking whether it is a good idea to remain in a workplace pension.

However, there are a number of important benefits you could lose if you choose to opt out of your workplace pension scheme.

State Pension may not be enough

Most of us will receive some state pension when we retire. What you get depends on how many so-called 'qualifying years' of National Insurance (NI) contributions you have. These are earned over your lifetime and how many you receive generally depends on how many years you're in work, and you will need a minimum of 10 years before you'll get any payment at all.

The Retirement Living Standards say that, by today’s living standards, you need at least £12,800 per year as a minimum, to live on as a single person. This is more than the State Pension, currently £10,600 per year, therefore there is a shortfall, and you will need to have other savings if you have not paid into a pension.

Tax relief on pension contributions

If you opt out of the workplace pension, it’s like turning down free money, because your employer will stop paying in as well.

By contributing to a pension you also get help from the Government through tax relief. When you earn money you pay income tax, usually at a standard rate of 20%, but at 40% or 45% if you are a higher earner. When you choose to put some of that money into a pension scheme, you no longer have to pay tax on it. What this means in practice, is that if you want to put £1 into a pension, it’ll only cost you 80p if you pay tax at the standard rate – the Government puts in the other 20p.

For most high earners, the advantages could be even greater. For someone paying tax at 40%, it only costs them 60p, because the Government contributes the other 40p. A combination of tax relief and a scheme where an employer matches what you put in means you could get £2 in a pension (one from you and one from your employer) at a cost to you of just 80p. There aren’t many investments that can match that.

Let your pension grow

It may seem early to start planning for later life but remember you could have more than twenty years' retirement, as we are living longer, and you will need an income to fund that. A workplace pension is one way to provide an income. As well as your payments, you could benefit from contributions from your employer and the Government. Usually, the younger you are when you start paying into a pension the better. The money has more time to grow.

Even if it’s only a small amount, the money you put away early in life can build up over time.

Unless your retirement is imminent, there’s still time to build up some money for your later years. Staying in a workplace pension is worth considering.

Before making hasty decisions take advice

Unlike other ways of saving, being in a workplace pension means you aren’t the only one putting money into your pension. If you earn more than £6,240 a year, your employer has to contribute too.

Contributing to a pension does come at a cost. However, opting out now and giving up on the money your employer puts in will greatly reduce your pension at retirement and could mean that you’re still going into work long after the point when you’re ready to stop.

No matter what age you are, pensions and retirement planning can seem complicated. For some it may be a long way off and way down the priority list, whereas some of you may be thinking more about what your retirement is going to look like, and what you have saved so far.

Reassuringly, our team of experts will work with you to guide, support, and advise on what’s right for you to meet your goals and objectives. Visit our pension and retirement pages here.

At Armstrong Watson Financial Planning & Wealth Management, we work with you to build your retirement plans and regularly review these so you know if you will remain on track. We can use cash flow forecasting to allow you to understand your plan more easily so you can make informed decisions.

Please get in touch if you would like to discuss your pension with a member of our Financial Planning team.

Contact us

Related news

Building a secure financial future: The importance of early pension savings for younger workers

  • 9th August 2022
Worried about pensions

Pension flexibility – understanding the benefits and the risks

  • 12th July 2022