Can I opt out of my workplace pension?
Opting out of your workplace pension might give you a little pay rise, but it’s not a decision to take lightly. Here’s everything you need to know, including how to do it, the benefits and the risks.
Thanks to auto-enrolment, your employer is legally required to enrol you on a workplace pension, as long as you meet certain eligibility criteria. However, your workplace can’t force you to pay into it.
Opting out of your workplace pension may be tempting, especially when you are short of money or have more pressing financial goals. However, it could have a long-term impact on your finances.
Here, we explain what opting out of your pension involves and what you should consider before making a decision to do so.
Your employer is legally required to enrol you on a workplace pension, as long as you meet certain eligibility criteria.
There are some occasions where it may make financial sense to opt out of your workplace pension.
While opting out of your workplace pension might give your finances a short-term boost, it could seriously damage your long-term plans.
Stopping your pension contributions only makes sense if it’s genuinely going to help you strengthen your financial future.
What happens if you opt out of your pension?
Auto-enrolment in workplace pensions was introduced by the government in 2012.
It aims to ensure that eligible workers, aged between 22 and the state pension age and earning above a certain threshold, are automatically enrolled in a workplace pension to save for retirement.
If you choose to opt out of your workplace pension, you may notice that your take-home pay goes up.
But before you get too excited, it won’t go up by the amount you were contributing. This is because you received tax relief on pension contributions, and that money will now be taxed as part of your income.
You’ll remain opted out for three years, and your employer will automatically re-enrol you after this period, although you can opt out again.
Legally, employers must check with you every three years to see if you’ve changed your mind about joining the workplace pension.
Opting out of pension contributions doesn’t mean you’ll lose the savings you’ve made so far.
Your contributions will remain invested in your pension until you start taking money out - which is any time from age 55, rising to 57 from 2028.
You can, however, ask for a refund if you leave within 30 days of enrolling.
If you want to rejoin the scheme at a later date, you can. However, your employer is not obliged to rejoin you more than once in a 12 month period.
What are the benefits of opting out of a workplace pension?
There are some occasions where it may make financial sense to opt out of your workplace pension. You might need the money to clear any high-interest debts, for example, so that a year down the line, you’re in a better position to save for retirement in earnest.
If you stop contributing to your pension, though, it’s important to set up standing orders or automatic transfers to make sure the money you need to save isn’t frittered away.
What are the downsides of opting out of a pension?
While opting out of your workplace pension might give your finances a short-term boost, it could seriously damage your long-term plans.
Without decent pension provision, you may need to work longer or move home when you retire.
You might also find yourself desperately trying to catch up later in your career, struggling to make larger pension contributions to compensate for the years you missed.
If you’re in your 20s, you might not see the point in saving for retirement yet.
However, this is the smartest time to start saving for retirement. That’s because the earlier you start, the more time you’ll give your savings to grow and the less you’ll need to save overall.
According to figures from Fidelity Investments, if you were to start saving £1,000 a year from the age of 25 into a pension, you would have a pension pot worth £121,025 by the age of 65 and be able to stop paying into it by the age of 55. This assumes a 5% growth rate per year.
In comparison, if you started paying £1,000 into your pension 10 years later from 35 years old, it would only be worth £74,299 by the time you reached 65.
This highlights the fact that the sooner you can start saving, the better.
You can find out more about how much you should be saving for retirement using our free UK pension calculator.
Here's a summary of the main pros and cons of opting out of your workplace pension:
| Pros | Cons |
|---|---|
| Your take-home pay will increase slightly | Your take-home pay won’t increase as much as you might expect as the extra money will be taxed |
| You may be able to pay money into a personal pension instead, such as a SIPP | You’ll miss out on ‘free’ money from your employer if they match your pension payments |
| You could divert your pension payments towards another goal, such as buying a home | You’ll miss out on pension tax relief from the government |
| You may end up needing to pay more into your pension at a later date |
How to opt out of a pension
It’s pretty simple to opt out of your pension. Generally, you’ll just need to contact your pension provider and get a form that opts you out of auto-enrolment.
Your employer legally has to give you the provider’s details if you ask for them, so speak to your HR department if you’re not sure where to find them.
If you opt out less than a month after you were auto-enrolled, you’ll get any contributions back. Otherwise, they will remain invested for you to access once you’re old enough.
Should you opt out of a pension?
Generally, it’s not a good idea to opt out of paying into a workplace pension.
Stopping your pension contributions only makes sense if it’s genuinely going to help you strengthen your financial future.
Workplace pensions are a unique, tax-free savings vehicle that also gets topped up by your employer. Some employers will also make generous contributions on your behalf, over and above what they are required to pay in by law.
By opting out, you are essentially turning down free money.
If you’re in your 20s or 30s and decide to pause your contributions for a year to clear a debt or help with an expense like buying a house, the impact will not be as great.
But if you’re closer to retirement or end up halting contributions indefinitely, it could have a more serious impact on your future financial security.
What if I want to save in my own pension?
Affordability may not be the only reason you want to opt out of your workplace pension.
You may want to save into your own personal pension, such as a self-invested personal pension (SIPP) instead, which offers a wider choice of investments and better growth potential.
You might also find it easier to invest in a way that aligns with your values with a pension that you have arranged yourself.
However, the catch is that by opting out of your workplace pension in favour of another, you may miss out on contributions from your employer. These can be generous, especially for higher earners.
In these cases, it may be worth remaining in your workplace pension, which your employer will pay into, and then paying an additional amount into the personal pension of your choice.
Need help with your pension?
It can be hard to decide when to start a pension, how to maximise contributions or whether opting out is worth considering.
Unbiased can quickly match you with a qualified financial adviser who can help you make the right decisions based on your unique circumstances.
If you found this article useful, you might also find our article on what to do if your employer hasn't paid your pension contributions informative, too.
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