Simple pension mistake wrecks retirement and more of us are making it

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Martin Lewis gives advice on auto-enrolment pensions

More than one in four large businesses report an increase in the number of employees pulling out of workplace pensions in recent months and the numbers are expected to rise.

The auto-enrolment pension scheme, launched in 2012, has given more than 10million mostly lower paid employees a valuable workplace pension for the first time.

Employers must automatically enrol workers but they retain the freedom to opt out later on if they choose.

So far, more than nine in 10 have decided against opting out, but the numbers are starting to edge up as household budgets are squeezed, according to research from workplace savings and pensions fintech specialist Cushon.

More than half of Britons have already cut down on non-essential spending with a third no longer able to save money each month.

Many are now halting workplace pension contributions as they frantically search for ways to make savings, said Steve Watson, director of policy and research at Cushon. “Opt-out rates may rise higher as the cost-of-living crisis drags on, jeopardising people’s future financial health.”

Separate research from Saltus Wealth Index shows that one-in-eight have cut pension contributions over past six months, and almost as many plan to follow suit in the next six months.

Under auto-enrolment, employees must contribute four percent of their earnings to their company pension, with their employer contributing another three percent and tax relief adding one percent, lifting the total contribution to eight percent of salary.

By opting out, employers are effectively turning down free money from their boss and the taxman. Plus all future growth on those funds.

Watson called for employers to educate employees about the advantages of their company pension. “They could also boost the financial incentive to carry on saving by raising the company’s own pension contribution.”

He also called on more companies to introduce tax-efficient ‘salary sacrifice’ schemes, where employee’s pension contribution is taken out of pre-tax earnings.

Salary sacrifice saves someone earning £30,000 a year around £180 in National Insurance contributions, while a £50,000 earner would save around £300. “Their pensions contributions will remain the same, while take-home pay may actually increase,” Watson said.

Unless people stick with auto-enrolment, the UK faces a future savings crisis as workers reach retirement with insufficient savings, he warned.

The Government has backed plans to lower the age at which employers must enrol workers into a scheme from 22 to 18.

Kate Smith, head of pensions at Aegon, said: “This is a real boost because those early contributions have longest to compound and grow.”

Ministers are also supporting plans to abolish the £6,240 lower earnings limit for contributions. “When this comes into force, contributions will be based on the first pound of earnings, which will boost both employer and individual contributions.”

Average income for pensioner couples fell from £817 a week to £791 in the tax year to April 5, 2022, a drop of £1,352 over the year.

Single pensioner incomes dropped from £401 a week to £387, a yearly fall of £728, latest official figures show.

Damon Hopkins, head of DC workplace savings at consultancy Broadstone, said a pensions crisis is looming as living standards decline and incomes fail to keep pace with inflation.

“Some 12.5 million working aged people are saving too little for retirement. The nation is sleepwalking towards a retirement crisis.”

Too many rely purely on the state pension in retirement, which now provides more than half of single pensioner incomes.

The decision to suspend the state pension triple lock for one year hit pensioners hard, and its long-term future remains in doubt.

Even a beefed-up auto-enrolment scheme won’t be enough to meet the savings shortfall, said Tom Selby, head of retirement policy at AJ Bell.

“People also have to save under their own steam in personal pensions and tax-free Isas if they can afford to do so.”

The auto-enrolment scheme is possibly the only successful pensions policy initiative in the last 30 years. It would be a mistake to opt out of it.

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