Is it worth opting out?

specialboy

A friend of mine earns £20000, he is 47 and at present has no pension whatsoever, with the new rules coming in he will have to pay into a pension but he is thinking that it will leave him struggling now and may not benefit him in the longer term when he comes to retire, would he be wise to opt out at his age? He's under the impression that anything he gets from it will only be taken from any other benefits he may be entitled to at retirement.

saver861

When I was 47 it still seemed like a long time to retirement. It aint ....

Thats not a good position for your friend .... I'd be looking at getting into pension mode pronto ..... as it stands he has nothing until his retirement age which will be 67 at least and by then could be more.

If he is struggling now on £20,000 think about it when its 75% less.

dunstonh

but he is thinking that it will leave him struggling now and may not benefit him in the longer term when he comes to retire

Why does he think that?

If he is going to struggle now, how does he feel about having around £8000 a year state pension in retirement?

He's under the impression that anything he gets from it will only be taken from any other benefits he may be entitled to at retirement.

The number of benefits are being reduced with the introduction of the new state pension. What is left will only take him to around £10,000 a year. He is consigning himself to a retirement on the breadline.

neilvw

The idea is that the New State Pension (if paid in full) will be just above the threshold for Pension Credit, and therefore anyone on the full amount will not be entitled to means-tested benefit, unless there are special circumstances such as disability or eligible housing costs.

The Government is rightly trying to turn around this perception of it not being worth saving anything.

And he mustn't forget that employer contribution and the tax relief.

His minimum starting contribution will be about £9.44 a month net, rising to £37.79 a month net by October 2018 (assuming a static £20k salary).

atush

It is 20 years to retirement, he should not opt out. That is if he can ever afford to retire at all.

the benefits he is counting on wont be there.

jamesd

From September 2018 the auto-enrolment contribution rates are:

Employer: 3%
Employee: 4%
Tax relief: 1%

Those can be percentages of either total pay or qualifying earnings, which are around £5800 lower than total pay.

Assuming it's done on qualifying earnings of £14,200 the net cost is 3% of that, £426 a year, £35.50 a month. The total going into the pension would be £1,136 a year, £94.66 as month. Over 21 years to a state pension age of 68 that could lead to a pension pot size of £42,000 if long term UK average growth rate of 5% plus inflation was obtained. That in turn could produce an income of around £2,100 a year at 5%, growing with inflation, or £1,680 at a more cautious 4%.

So at 2018 rates he might spend £35.50 a month to get an extra £175 or £140 a month in retirement, in today's money. If he gets the maximum state pension and no other income all of this will be tax free. Means tested benefits will not take him to this level of income.