Opting out of auto-enrolment rise could cost £250,000

Marina Gerner
28 March 2018

Pension savers who opt out of the auto-enrolment increase from 6 April could lose a quarter of million pounds, according to figures from Fidelity International.

Next month, contribution levels for those have been auto-enrolled to save into a pension will rise from 2% to 5% (or 1% to 3% for an employee). 

While auto-enrolment is widely hailed a success, there have been fears that savers will opt out of their automatic pension savings once contribution levels rise.

But potential opt-out rates are not the only concern. Fidelity has calculated that those who stay at the current level of 2%, split equally between employee and employer, could potentially bank a pension pot of £94,092 by the time they reach retirement. Meanwhile, those who accept the 5% increase could see their money reach £235,229. And to do so would only cost £35 a week for someone earning £35,000.

The calculation is based on a person who starts saving aged 33 to age 68. Earnings are assumed to increase at 3.75% a year and investments grow at 5% a year. The starting salary is £35,000. At retirement, a withdrawal rate of 3.5% is assumed.

Those who do not increase contributions would get nearly £10,000 a year less, which is the equivalent of not receiving the current basic state pension. 

Carolyn Jones, head of pensions product at Fidelity International, says: “Auto-enrolment was a water shed moment as it changed the dial from ‘do nothing, get nothing’ to ‘do nothing, get something’. Saving for retirement is no longer an option - it is an essential period of life to plan for as the state begins to tussle with the challenges of an ageing society. 

“While there is lots of noise about the cost to consumers, auto-enrolment - even with the uplift in contributions - still offers people a return of nearly 350% on their personal contributions thanks to a boost from their employer and tax relief.”

Given that the success of auto-enrolment is largely down to people’s inertia, it may be the case that most people won’t bother to opt out of the next increase. 

But if the current squeeze on consumers continues, while house prices continue to rise, young people could choose to opt out of increasing their pension savings. 

Given the lower levels of income and assets among the current generation, compared to the previous generation at the same age, those young people who earn the least may decide to opt out of their pension in favour of saving for a house deposit, or even to keep up with living costs.

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