Auto-enrolled, should I opt out?

Calfuray

Hello,

As title, I've been auto-enrolled. This is just an internship for 3 months, after which point I may or may not have a job. I'm 24.

I don't have any idea about pensions, and am trying to read up. I think the management charges are a little high?

I'm not sure if I should opt-out and reevaluate once I know what's happening in September.

Thanks,
Cal

hyubh

Calfuray wrote: »

I'm not sure if I should opt-out and reevaluate once I know what's happening in September.

Are there employer contributions? If there are, then opting out means taking a voluntary pay cut in effect.

dunstonh

free money vs no free money.

I think the management charges are a little high?

Capped at 0.75%. What are yours?

Calfuray

Thanks for the replies.

1% for me,
1% for employee,
£1.50 management charge per month,
investment charge of 0.3% per year of fund.

No details yet about funds etc.

kidmugsy

Stay in, then you've had a flying start if you join the staff in 3 months time. And if you don't, the money doesn't evaporate - it'll be there for you in future, both your contribution and your employer's.

dunstonh

£1.50 management charge per month,
investment charge of 0.3% per year of fund.

Why do you think that is expensive?

skintpaul

3 months of payments in will be worth jack, unless you get to stay on..

I have big reservations about the auto-enrol scheme, especially as you used to have to get proper advice before taking a pension on..

hyubh

skintpaul wrote: »

3 months of payments in will be worth jack

Correct, but if the OP opts out, they will just lose the employer contributions.

I have big reservations about the auto-enrol scheme, especially as you used to have to get proper advice before taking a pension on..

I am at a loss as to what you are referring to. Could you expand?

bowlhead99

skintpaul wrote: »

3 months of payments in will be worth jack, unless you get to stay on..

Clearly, 3 months of payments will not be paying you much per year in retirement. However, it doesn't cost much and may well be worth more than the paltry amount you paid in. In the context of how much money you will earn in your entire life:1% of your monthly wages, at the beginning of your career when it is a small absolute amount of pounds per month, which would have been taxed if you had simply taken the cash and not contributed to the scheme, pretty much costs 'jack' too.

If the company contributes as much as you do:

Half the money in the fund didn't get paid by you, it got paid by your employer. And a tenth of the money in the fund (a fifth of what you put in) didn't get paid by you, it got paid by the taxman, who would have taken the fifth of your money away from you as PAYE tax if you had taken it as salary instead of pension. So basically most of the money in the pot (60%) was NOT paid by you.

So for every £50, you only paid £20 while someone else paid £30.

Then every year for the next half century (you're 24 and will presumably live to at least 74...) the whole £50 grows - by stockmarket growth of say, 5% a year in real terms while falling back by the 0.3% a year due to charges. So, call it 4.7% a year. After five decades at 4.7% compound return, the gross amount of money invested will have grown tenfold in real value. Perhaps twentyfivefold in nominal value (6.7% a year) but you have to take inflation into account, so the headline sum of ~£1250 is only 'worth' 10x real growth for ~£500 in today's money.

So you have a choice. Put your £20 in the pot and turn it into £1250 which is worth £500 in today's money. Or, don't put the £20 in the pot, because you thought it better to fritter that £20 away on nothing much while you wait for September, and opt back in later.

As a general rule, a pension where the company gives you free money that they don't give you if you don't take the pension, is a no-brainer.

However, you mention a fixed charge on top of the 0.3% management fee, at £1.50 a month. If you are on a low salary, say £10k a year, the combined 2% from you and your employer and the taxman is only £200 a year. Or £50 in the 3 months of your internship. Within the next four years, a charge of £1.50 a month will reduce that £50-plus-annual-investment-growth to pretty much nothing.

So, if there is a fixed charge and you're only going to pay in for 3 months, it's probably not worth it. If your salary is higher, the £1.50 a month is a relatively smaller percentage. If you go permanent or move somewhere else where you can transfer the pension and keep it going, the £1.50s every month are split over a bigger and bigger pot and make much less of a dent.

In your shoes I would probably go for the pension because I would acknowledge that having 1% more salary, less tax, for 3 months, in my own pocket is worth pretty much nothing so I might as well use it as an opportunity to see what investments and pensions are all about, rather than ignoring the opportunity in front of me.

Actually at 24 I probably wouldn't have. Because I figured I would just do pensions later. But the fact I didn't take the opportunities to turn each £20 into £500 when starting out in my career, is one of the reasons I now have to put quite a lot into my pensions in my late 30s.

OldBeanz

I paid £100pa into a with profits endowment with SL for 42 years from 1973 aged 18. The payout was £34k plus £2/3k free SL shares. While I received some tax relief I would have received more if I had paid into a pension. SL went through a major crisis during this time and wp profit endowments are no longer seen as a good investment even if you could buy one.
Given that the average annuity is somewhere around £30k it just shows how much the average annuitant and their employers paid in over their lifetime.
Time is your friend. Retire 3 months earlier.

atush

Why would you opt out, if you are throwing away free money?

Bonkers.