Cost-of-living | Are your people opting-out of their company pension? Ensure they weigh their options carefully…

Are your people opting-out of their company pension? Ensure they weigh their options carefully…
Are your people opting-out of their company pension? Ensure they weigh their options carefully…

By David Pinner, Employee Benefits Consultant

Why are people choosing to opt-out?

As your people are struggling with the financial pressures of the cost-of-living crisis, the media are reporting that growing numbers are having to make some difficult spending decisions – cutting back ‘discretionary’ spending to ensure they can afford their essentials.

In these troubling times, it isn’t surprising that for some, workplace pension contributions are considered discretionary, and they are making the choice to opt-out.

One recent survey revealed that more than 1 in 5 people have either opted out or are considering opting out of their pension scheme in response to rising inflation (AJ Bell, Sep 2022). The Department for Work and Pensions’ own figures released on 26 October are more modest, with opt-out rates increasing by 19.5% to 10.4% overall.

As an employee it is difficult to escape the financial headwinds:

  • Increased road fuel costs: according to, fuel costs are more than they were at the end of January, with unleaded petrol still around 15p per litre more expensive

  • The cost of living has increased generally, with the retail price increasing by double digit amounts since April

  • The energy price cap has almost doubled since the start of the year, the effect of which employees will feel most during this coming winter

  • Two million people have already seen an immediate increase in their mortgage payments following recent interest rate rises, and with interest rates forecasted to rise further in the short-term, homeowners could come under significant financial pressure

  • It was widely reported in the media recently that people under 30 in the UK are facing a ‘cost of renting crisis’, with recent figures showing that 40% of this age group are spending more than 30% of their income on rent. (These figures were released prior to the recent interest rises applying additional pressure to buy-to-let landlords)

The financial impact of opting-out – some examples

For employees having to make these difficult financial compromises, it is important they understand the long-term impact of temporarily opting out of their workplace pension.

  • 25-year-old

  • contributing £200 a month

  • pauses contributions for three years

Final value (no opt-out) - £292,340
Final value (temporary opt-out) - £249,419
Decrease in final value - £42,921

  • 30-year-old

  • contributing £200 a month

  • pauses contributions for three years

Final value (no opt-out) - £223,796
Final value (temporary opt-out) - £189,354
Decrease in final value - £34,442

*Calculations assume a retirement age of 67 and an annual growth rate of 5 per cent, and an annual management charge of 0.5%.

How can you help your people to make smart financial decisions?

As an employer you are not immune to some of these financial concerns, but you can take some cost-effective measures to support your people to make informed financial decisions:

  • Education about the workplace pension scheme

The nature of automatic enrolment doesn’t support employee engagement, as its design means that no decisions are made by employees prior to being automatically enrolled. Running pension education sessions giving insight into how the workplace pension operates, and of course highlighting the potential benefits, may support greater understanding. Once employees understand the role of tax relief and employer contributions they often see how much they are giving up relative to the saving and continue their membership. From an employer perspective, it also gives your people a greater appreciation of a relatively expensive benefit which is funded by your business.

  • Wider financial education

Equipping your people with the essential financial building blocks can support improved decision-making, with content such as:

  • how to budget effectively

  • sensible use of credit

  • how to build financial resilience through savings

  • mortgage options in times of rising interest rates

  • where to get help if the situation is more serious

This financial education also helps to contextualise where the workplace pension fits in, as part of an individual’s long-term financial planning.

A more efficient method of deducting and submitting contributions, with the employee receiving the same pension contributions but retaining more of their take-home pay. This can have a big impact, with earners who are below the upper threshold and are paying 5% of salary seeing a saving of over 1% of pay shared between the employee and employer.

  • Other employee benefits which help make earnings go further

Some benefits like a cash plan, or a retail discount platform, help employees get more from their salary. Some of these types of benefits are bundled within other parts of your benefits offering, so now is a great time to review these and re-promote them to your people.

Implementing financial education and supporting benefits for your people

The number of workplace pension opt outs has risen over the last few months, but thankfully the overall opt out rate is still relatively low - for now.

While we cannot underestimate the gravity of some of the financial choices facing your people, you can take some actionable, practical measures to support employees to make properly informed decisions.

Johnson Fleming can help you to put support and employee benefits in place to help your people weather the current financial crisis, and help them to make good decisions that lead to positive financial outcomes.

Download our latest guide ‘Innovative ways to elevate your employee benefits and HR strategies for 2023’ to find out how to support your people - and protect your business - through the current troubling times, and look ahead to some innovations to consider for your 2023 strategy.

Download Guide

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