Lack of understanding could hinder success of workplace pensions
According to a recent workplace pensions report carried out by CoreData, nearly half (49%) of Britons are unsure whether they will opt out of the new workplace pension schemes.
Only 35% confirmed they will take part in those arrangements, with 16% planning to opt out. The high amount of people unsure of what action to take, together with the number of people looking to opt out, may highlight a lack of understanding of workplace pension schemes and the benefits they could provide.
Opting out of a workplace pension is effectively refusing ‘free' money from your employer and the Government. If you start saving little and often, early in life, it can have a significant impact on your level of income in retirement. Figures from investment company Skandia, part of Old Mutual Wealth, show that someone aged 25 earning a salary of £30,000 could end up with an annual income of £16,936 on top of a tax free lump sum of £92,500 if they opt to stay in a new workplace pension. If the same person opts out of the scheme until they are age 55 their income in retirement would fall to £1,352 on top of a lump sum of £7,550.
The employee does of course need to contribute towards the workplace pension too, but reassuringly, the survey by CoreData showed the majority of individuals seem comfortable with a 50/50 split between them and their employer.
Workplace pensions could make a real difference to the younger generation and it is a positive sign that only one in 10 under 25 year olds intend to opt out of workplace pensions. This compares against three in 10 for over 51 year olds, making the older generation three times more likely to opt out than the younger generation. This difference may be because lower earning employees in this older age bracket feel that until the possibility of means testing these benefits is removed they will simply be funding privately what the State will otherwise provide. Some may still prefer to use their existing pension savings arrangements to provide their future retirement income.
Adrian Walker, Skandia's pension expert comments: "It is concerning that so many people don't know what they intend to do when their employer introduces a workplace pension scheme. For the vast majority of people it will be a good option and if they opt out they will be giving up free money from their company and the Government. However, people should not assume that the minimum contribution levels proposed to be in place by 2018 will mean they are going to live the high life in retirement. They need to be clear on how much income these arrangements are likely to give them in retirement. If they feel there will be a shortfall they need to think about saving more in a tax efficient product such as a private pension or an Individual Savings Account (ISA).
"It is a really positive sign that the younger generation seem engaged, as this could be a substantial step towards easing the pension burden on the state over time. For those employees who will not be offered a workplace pension for some time, it is important that they do not make the decision to delay the start of building their retirement savings. Starting to save earlier will, in relative terms, significantly increase the eventual value of their future retirement income."