1 in 8 may opt out of workplace pensions as contributions increase

One in eight employees may opt out of their workplace pension schemes when contributions rise under auto-enrolment next year, according to research by Aviva. 

Total minimum contribution rates are set to rise from 2 per cent of salary (of which employee contribution is 1 per cent) to 5 per cent (employee contribution 3 per cent) in April 2018. A further increase to 8 per cent (employee contribution 5 per cent) is planned for 2019.

Pension providers have previously warned that many people might choose to opt out once the contribution level rises. Arguably, the levels are currently so low that many people may not be fully aware of the fact they’re paying into a pension.

The Aviva research surveyed 2,007 private sector workers. It shows that a third of employees are unclear on what they will do and 1 in 8 (12 per cent) say they will at least consider leaving their pension scheme. 

-Steve Webb: Beware of the tax raid on lump sums

The research has also revealed a gender divide when it comes to pensions. When it comes to those who said they will definitely opt out, 5 per cent of them were men and 2 per cent were women.

Colin Williams, managing director of Workplace Benefits at Aviva, says: ‘There are huge positives that can be taken from our findings. Only a small proportion of people appear to be intent on opting out of their pension when contributions rise. 

He points out that by staying opted-in, savers benefit from their employer’s contribution and the government’s tax relief as well. ‘The result will be that they are giving their future self a pay rise.’

Kate Smith, head of pensions at Aegon, says: ‘With employee pension contributions set to triple from 1 to 3 per cent in April there’s a risk opt-out rates may spike as people start to notice the impact on their take-home pay.’

After all, people are facing a triple whammy of squeezes with inflation currently running at a high of 3.1 per cent, slowly rising interest rates and stagnating wage increases.

Smith says: ‘In the near future, these pressures could act as the first big challenge to the government’s auto-enrolment programme.

‘Employers also face hard decisions. With their auto-enrolment contribution doubling from next April, increases in the minimum wage and Brexit uncertainty, many will struggle to justify wage increases.’ 

She concludes: ‘Employers are between a rock and a hard place, not knowing whether to flag up auto enrolment increases to their employees to be helpful and drive up pension engagement, or whether this risks putting them off pension saving.’

Keep up to date with all the latest personal finance news and investment tips by signing up to our newsletter. Email subscribers will also receive a free print copy of Money Observer magazine.

Subscribe to Money Observer Magazine

Be the first to receive expert investment news and analysis of shares, funds, regions and strategies we expect to deliver top returns, plus free access to the digital issues on your desktop or via the Money Observer App.

Subscribe now

Add new comment