Why would someone want to opt out from a pension scheme?

JohnBravo

Hi,

Why would someone want to opt out from a pension scheme?
When you opt out you lose 1% from the government and 3% from the employer, right?

Emmia

JohnBravo said:

Hi,

Why would someone want to opt out from a pension scheme?
When you opt out you lose 1% from the government and 3% from the employer, right?

Because they want their pension contributions in their pocket, for spending in the here and now 


It's a really short sighted approach, but I can see that if you're young or in a situation with pressure on the household budget it is a tempting choice.

Brie

And some employers seem to actively encourage people to opt out or at least to downgrade their membership.

I used to work for an employer that had a DB scheme and when it closed to new members and a DC scheme put in place instead people were encouraged to move to the new scheme to get greater flexibility.  That's the scheme I was able to join when I started with that company and while the DB was a better scheme the DC was still pretty good as employer contributions were 17%.  And then they closed that to new members and again people were encouraged to join the new replacement DC scheme where contributions were 10%.  And people agreed to do move to the new schemes.  "Because my manager will like me better if I agree"  was one reason I heard.  Silly but true.  

And when autoenrollment came along the employer was very vocal about what people needed to do if they wanted to opt out.  All completely legal of course but the cynical amongst us could see what they were doing.

BrotherUuurgh

From someone who did it everywhere they went, it's just for the "extra" money in the pocket each month.

Contrary to Brie above, my most recent employer encouraged me not to opt out, saying how it would be a pay cut at the very least.

Regrets regrets... 

400ixl

Whilst a lack of knowledge can be a big factor, unfortunately for some that 1-2% personal contribution can be the difference between getting through the month without going into debt or not.

Personally I have never worked for a company who does not encourage all employees to the best for them, including providing access to independent advice when schemes are making big changes.

If at all possible everyone should take advantage.

Marcon

JohnBravo said:

Hi,

Why would someone want to opt out from a pension scheme?

Because they can't afford to join.
Because they don't trust pensions.
Because they think they would only ever be able to build up a tiny pension and it might mean they lose state benefits.
Because they don't think they will ever get old...
Because they'd sooner have the money and spend it NOW.
Because their mate down the pub thinks they'd get a better return if they stick it on the horses.
Because their employer hasn't complied with its auto-enrolment obligations and the employee can't be bothered to do anything about it.
Because the employer has made it clear that those who want to be in the pension scheme might find they get lower salary increases/be more likely to be selected for redundancy/treated worse than colleagues who opt out.

In short, plenty of reasons.

JohnBravo said:

When you opt out you lose 1% from the government and 3% from the employer, right?

Wrong. If the employer only uses 'band earnings' then the figures are far lower in comparison with full earnings.

Baldytyke88

A colleague that I used to work with opted out of the local authority scheme because that is what her husband advised her to do. It was a part-time role, but still a lot of money over the 10+ years.

incus432

Worked with 2 girls in early 20s, FT NHS secretarial jobs, and they both opted out of pension scheme. Despite everyone telling them how foolish and short-sighted it was, they couldn't see past a bit extra on their payslip. That was 2010, I wonder if they regret it. 

JohnBravo

How can you tell when 'band earnings' are in use?

I think some regular folks have no confidence in the stock markets especially these days while the pros moved on from derivatives to different instruments e.g. ETFs, options.
To me these default 3 investment tiers they let you choose from is an insult to anyone who did any investing in his life.
I think the idea is not to go with the mainstream when investing especially when a major correction is in the air.

On the other hand with the current and true rate of inflation (no the CPI figure) not sure what this money is going to be worth 20 years down the line. It could be peanuts.

I hear stories of some boomer Americans who lost their pensions during the DotCom bubble and had to seriously downsize their lifestyles.

hugheskevi

It can be optimal to opt-out of a final salary scheme, either to benefit from a deferred award calculated on a higher past salary that would otherwise be lower if an individual remained in the scheme, or because you think the revaluation of a deferred award will be better than an extra year of service at a static or only slightly increasing salary.

The number of people this applies to is higher than one might immediately think, but the vast majority don't realise it so are never aware of what they lost by remaining in the scheme. Usually the people in this situation will be in their last few years of work.

It is of course not something that should be done without careful consideration.

HampshireH

There is a huge lack of awareness in young people and it isn't something which is taught (even mentioned).

When I left school and went into uni and work I wasn't give a pension option until my 7th year in employment. At that point it was just available not discussed or promoted. I never joined. I had no understanding.

When auto enrollment came in 1 opted out for a few years. At this point because I couldn't afford it and lived alone with bills etc. Last my employer got the company in to run sessions and explain the whole thing. This was a turning point. I joined and paid the minimum. Over the years I've increased that incrementally.

Now I pay a full 10% (max) in and get max back from employer. Playing catch up on lost years and treating my later life as a bit more of a priority.