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

Exodi

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?

I'm not sure what you mean by '1% from the government' - the minimum workplace pension contributions are 3% employer and 5% employee. The government then provides basic rate tax relief (20%) in the pension pot. The employee is automatically enrolled, unless they request to opt out.

To illustrate this, let's look at Bob.

Bob is 21 and on the National Living Wage of £11.44 an hour. He works full time of 37.5 hours per week.

This means his gross pay per week is £429.00
Out of this he'll pay about £37.45 in income tax and £14.96 in NI
This leaves him with £376.59 a week in his pay packet.

Bob is enrolled in a workplace pension scheme, where the employer pays the minimum contribution of 3% alongside an employee contribution of 5%. This means he'll lose another £21.45 from his weekly pay for his contribution, to receive £39.68 in his pension pot (including the employer contribution and tax relief).

It's obvious to most that losing £21.45 to receive £39.68 is a great deal, but Bob has a 4 figure rent bill in a cost of living crisis and feels that current Bob needs the money more now, hoping that future Bob will be in a better position. He's also young and feels that thinking about pensions is for 'old people'.

It's not uncommon for 50 year olds to come onto this forum that have only just started taking their pension seriously, so Bob's attitude is not surprising.

So yeah, it's not the best financial decision to opt out and short-sighted - but I can understand why someone might do it (even if I don't agree).

I didn't start taking my pension seriously until 30ish, I'd imagine 18 year old me would have probably have had similar views to Bob (though auto-enrolment wasn't a thing at the time, you had to opt in, which I don't think anyone did in low paid jobs, hence the change).

Sarahspangles

Since it hasn’t been mentioned, some people opted out when there was a perception that Buy to Let was a better way to provide for one’s old age than a pension.

Marcon

JohnBravo said:

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



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

Ask your employer, or just look at your payslip and see whether pension contributions are based on the whole of your (gross) salary for the month.

You'll always hear plenty of stories. Some might be true, or at least have a grain of truth in them...

Marcon

MEL1981 said:

My employer works different. We don't get a matching part to our pension, but instead get a lump sum 20% of salary to do what you want with it. Feels an odd way to work as it doesn't incentivise people to put it into their pension although a lot do with the tax benefits.

All other companies I've worked have had a matching component etc to incentivise.

Mel

Provided your employer auto-enrols employees and pays the minimum contribution, it's up to them what they do on top of that. Depending on the profile of the work force, paying a higher salary (and that's all the '20% lump sum' does) might be much more effective in attracting and retaining suitable people.

Silvertabby

Some of the reasons people trotted out for wanting to opt out of the LGPS (public sector final salary scheme) were crackers.  I've listed these before, but for the newbies:

My husband has a good pension scheme so I don't need this one as well.

This is just another council tax, and if I don't have to pay it I won't.

The money is better off in my pocket than the council's.

The LGPS is a rip off.  You are taking over £100 per month from me, when I can get a stakeholder for just £20 per month.

Now that the State pension will be the same as my wages I don't need this pension as well.  (After I explained what the restoration of the salaries link to the State pension really meant....) Well, the money is better off in my pocket than the council's.  

Emmia

When looking to buy my first property in 2008/9 one mortgage advisor at a branch of NatWest told me to stop paying into my Civil Service pension so I could afford a larger mortgage...

I knew this was a terrible idea at 28 so I didn't take out a mortgage,  and I also closed my current account and savings account that I had with them.

Others may have made a different choice based on that advice 

Brie

Oh and don't forget the bad advice some people are given by people who proclaim to be financial advisers.  I worked on the pension reviews that were happening in the late 1990s and one person said that he'd opted out of his DB work scheme cuz a guy (financial adviser) down the pub said he'd buy the drinks all night for anyone who signed up for a personal pension.  Didn't matter if anyone paid into the PP as long as they signed up as that's all his bonus was based on. 

Marcon

Exodi said:

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?

I'm not sure what you mean by '1% from the government' - the minimum workplace pension contributions are 3% employer and 5% employee. The government then provides basic rate tax relief (20%) in the pension pot. The employee is automatically enrolled, unless they request to opt out.

I imagine this is where the '1% from the government' comment comes from (taken from NEST's website):

justwhat

I have met many people that claim they can't afford the pension coming of there salary each month. However in some instances they have access to overtime.

They don't want to work overtime because the tax man takes more money from them. Its mostly lack of knowledge and money management if you ask me.

Some younger people don't pay in because its some many years until they reap the benefit of a pension. Maxing out contributions to a pension in later years can still be beneficial

i paid into a pension in my 20's but only the minimum amount.

Cairnpapple

If you're working in casual, short term, or multiple jobs,  then building up lots of tiny pots can just seem like too much hassle.

As someone said above, not thinking you'll live long enough to use it. My grandparents died at 39, 59, 71 and 71 and my mum at 49, so if it wasn't for my dad still alive in his late 70s I wouldn't have a lot of belief in my genetics taking me much past SPA.