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

22225

hugheskevi said:

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.

Hi thank you for this. This might affect me in the Teachers Pension Scheme but I don't know what I should do about it. The scheme is so complicated and has so many legacy parts. I was full time whilst I was in the final salary era but have been part time since having my kids. Is this going to be terrible for the final salary part of my pension? Is there anything I can do about it apart from going back full time in my last year of teaching? Or is it more to do with my actual salary level? I have emailed them them a few times but they haven't got back to me as I understand they are extremely busy with everything going on.

AlanP_2

22225 said:

hugheskevi said:

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.

Hi thank you for this. This might affect me in the Teachers Pension Scheme but I don't know what I should do about it. The scheme is so complicated and has so many legacy parts. I was full time whilst I was in the final salary era but have been part time since having my kids. Is this going to be terrible for the final salary part of my pension? Is there anything I can do about it apart from going back full time in my last year of teaching? Or is it more to do with my actual salary level? I have emailed them them a few times but they haven't got back to me as I understand they are extremely busy with everything going on.

There are a few people on here who are familiar with the TPS and will hopefully provide some comment.

There is also a completely separate teachers / TPS forum I have seen mentioned so googling for that might be a good idea.

Dazed_and_C0nfused

22225 said:

hugheskevi said:

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.

Hi thank you for this. This might affect me in the Teachers Pension Scheme but I don't know what I should do about it. The scheme is so complicated and has so many legacy parts. I was full time whilst I was in the final salary era but have been part time since having my kids. Is this going to be terrible for the final salary part of my pension? Is there anything I can do about it apart from going back full time in my last year of teaching? Or is it more to do with my actual salary level? I have emailed them them a few times but they haven't got back to me as I understand they are extremely busy with everything going on.

Going part time usually has no impact whatsoever on the final salary part of a final salary scheme.

Your pension is based on the full time equivalent salary, not your actual part time salary.

Where things differ is with the years of entitlement you accrued.

If you are part time, working 50% of the full time hours then you only accrued 0.5 of a year for pension purposes.  But the salary your pension is based on is the full time equivalent.

I would be surprised if TPS didn't work like that.

LHW99

And as one further factor, there is a surprising (to me) proportion of the population who don't understand percentages well.

https://knowledge.insead.edu/marketing/so-you-think-your-customers-understand-percentages

hugheskevi

22225 said:

hugheskevi said:

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.

Hi thank you for this. This might affect me in the Teachers Pension Scheme but I don't know what I should do about it. The scheme is so complicated and has so many legacy parts. I was full time whilst I was in the final salary era but have been part time since having my kids. Is this going to be terrible for the final salary part of my pension? Is there anything I can do about it apart from going back full time in my last year of teaching? Or is it more to do with my actual salary level? I have emailed them them a few times but they haven't got back to me as I understand they are extremely busy with everything going on.

As said in the posts above, this is not a part-time issue due to the use of full-time equivalent salary to calculate pension benefits.

This sort of thing might apply if you were a few years away from retirement, still accruing pension in a final salary scheme, and a pay freeze was announced.

Let's say inflation was expected to be 3% p/a, you were in a 1/60th final salary scheme and had 35 years of service and earned £40,000.

Your accrued pension would be £23,333. One more year of service would increase that to £24,000. Or CPI revaluation would increase it to £24,033. So by opting out this individual would save contributions and get a higher pension. Even then, there are death and ill health benefits to take into consideration for the decision.

With the move of all members in the public sector to career average, this situation is now quite unlikely to crop up. Much more common is a big benefit from taking legacy pension at the normal pension age of 60 due to the 'take it or lose it' nature of several legacy schemes, which many members are not aware of.

And there are still some times when opting out to lock-in a higher past salary can be the right thing to do, especially in the Civil Service scheme where members of Premium and Classic Plus which have very long periods over which best pensionable earning are assessed can switch to the Partnership scheme to achieve that and so benefit from a different type of employer pension contributions. 

But all of these niche scenarios are complicated, and unless an individual is certain it is the right thing to do for them are best disregarded.

BlackKnightMonty

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 of the Global Financial Crash. It broke our economy.

Albermarle

Marcon said:

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.
Because they think that because pensions are taxable, the tax benefit just gets lost.

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.

I have added another reason in bold.

Albermarle

Probably worth pointing out as I do not think anyone has specifically mentioned it yet, is that some ( mainly larger) private sector employers actually pay more than the minimum required . I think that a contribution of up to 10% is not that uncommon ( sometimes linked to you adding more, but not always) .
So by opting out in this situation you are losing out on even more free money.

Pat38493

Albermarle said:

Probably worth pointing out as I do not think anyone has specifically mentioned it yet, is that some ( mainly larger) private sector employers actually pay more than the minimum required . I think that a contribution of up to 10% is not that uncommon ( sometimes linked to you adding more, but not always) .
So by opting out in this situation you are losing out on even more free money.

Yes - for example my employer matches up to 7%.  Also they allow us to contribute by salary sacrifice, thereby avoiding some national insurance, and they also agreed to share 50% of the employer savings on NI with the employee, so effectively I get a bit of extra matching above 7%.

kinger101

While I worked at university, I knew of two people who opted out of USS.  One educated to PhD level.  The both said they didn't trust they would get anything out as the government would just stop it.

I suspect they were both just thinking about the short term decided the narrative after.