Money Saving Expert founder Martin Lewis warns workers against opting out of workplace pension contributions
Employees have received a crucial pension alert as they could be “throwing away free cash”. You might be losing out on essential funds without even knowing it.
In the UK, many individuals have two kinds of pensions: the State Pension and workplace pension. The State Pension is supplied by the Government and depends on how many years you’ve contributed National Insurance (NI) payments.
Workplace pensions are the pensions that your employers arrange for you. Each new employer typically must establish one for you when you start if you’re eligible.
However, a financial expert has cautioned against opting out of these schemes. In an update on his Money Saving Expert (MSE) website, Martin Lewis provided further details.
Initially, he underscored the significance of pensions. He said: “I had far more questions for last week’s ITV Pension Special than usual, thousands upon thousands. Most from older people, but you shouldn’t leave thinking about your pension till, like me, your hair’s greying at the edges (though not quite as much as our design team’s photoshopping >).
“As most people put £100s or £1,000s in pensions each year from age 22, it’s something all should understand. For those saying: ‘Ah, just live for the now’… Remember, we typically only work 45 to 50-ish years of our 85-year lifespan and that work income needs to cover all the fallow years, meaning saving for retirement is crucial (when we’re little, our parents pay for us, but most then need do the same for our kids).”
Workplace pensions
As part of his broader pension guidance, Martin emphasised the importance of remaining enrolled in workplace pension schemes. “Employee?” he asked. “Don’t throw away a hidden pay rise. If you save, your firm MUST contribute too.
“I was asked in the show whether someone should opt out of their workplace pension and use a private pension instead. All the specialists and I immediately said NO! While there may be a marginal improvement in the investment choice, it’s likely throwing money away as…
“By law, employees aged 22 up to State Pension age, earning over £10,000/yr, are automatically enrolled into a pension (ie ‘opted in’ to contributing without being asked) and, crucially, if you’re opted in, your employer MUST contribute too.”
Martin outlined some of the key financial aspects. He stated: “For a Money Purchase pension, the minimum contribution is eight per cent on earnings between £6,240 and £50,270, though many employers will do it for more. And of that, the employer must contribute a minimum three per cent points of that (meaning you pay four per cent and there’s one per cent tax relief), though again, some pay more.
“This is a huge boon. It means it actually has to give you more money than just your salary (though, of course, your current disposable income is less due to your contribution). Per £100 in your pension, the employer adds £60, so that’s £160 total going in, and with the tax relief too, this only costs you £80 as a basic rate taxpayer – meaning you get at least double invested compared to the cost to you.” He consequently cautioned individuals to “beware” of withdrawing from the scheme. He explained: “Opting out is usually a bad idea, as you’re throwing away free cash.”
Martin continued: “Even if you think ‘I just want to lower my contributions’ beware: lower it below the minimum five per cent, then your firm doesn’t need to contribute (many do, but they don’t have to), so check before any action.”
Further details are available on the MSE website here.