Will savers opt out of pensions next month?

Marina Gerner
12 March 2018

Next month the contributions levels of those auto-enrolled in a pension will rise from 2% to 5%, which has raised concerns there will be a sharp rise in the number of workers choosing to opt out of their pensions.

Royal London, the insurer, however, argues that worries about large scale opt outs are unfounded.

Since auto-enrolment was introduced in 2012 nine million workers have been paying the minimum amount into their pension – 1%, with their employer also paying 1%.  Drop-out rates have been low, with only 10% opting out.

From April, the overall minimum level will rise to 5% (with employees contributing 3%, and employers paying in 2%). Further rises are set for April 2019, when the level of contributions will rise to 8%: 5% from employees and 3% from employers.

As contribution levels rise the number of workers that decide to opt out of their pension will inevitably rise, with the government predicting the figure will double having published assumptions that the opt out rate may increase from around 10% currently to 21.7% after April 2018 and 27.5% in April 2019. 

Royal London’s analysis, however, counters these assumptions. Instead, the pension provider argues that the rise in contributions will be accompanied by other factors that increase incomes. This means people are likely to take the pension increase "in their stride" as their overall take-home income rises.

The factors that will increase salaries include a national living wage increase, tax and NIC threshold increases, as well as general pay rises. 

The national living wage, for example, is set to increase by 4.4% in April. It covers more than 1.5 million of the lowest-paid workers in Britain who are most likely to opt out when contribution rates rise. 

Steve Webb, director of policy at Royal London, says: "The power of inertia remains strong – individuals will still have to actively opt out and the additional amounts they are being asked to contribute are still relatively modest, especially for the lowest paid workers who will be receiving a large increase through the national living wage."

He argues that evidence from the US suggests that when contributions into workplace pension schemes were gradually increased by a few percentage points from low single digit rates, opt-out rates were very low, and the same is likely to happen in the UK.

"We believe that relatively modest increases in contributions, combined with pay rises, especially for the low-paid, are unlikely to fatally undermine the success of automatic enrolment. The real focus should already be on how to get savers beyond the 8% minimum level that they will reach in 2019 and up to more realistic levels."

This article first appeared on our sister website Money Observer.

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