“Free money”- why do those eligible for it- not want it; guest blog from Ralph Frank

free money

NEST has recently published its latest annual ‘insight’, a study that looks at the behaviours and attitudes of members enrolled into workplace pensions.  The ‘insight’ finds that older workers have significantly higher opt-out rates from auto-enrolment than younger workers – 5% for those under 30 compared to 28% for those over 60.  One reason advanced for the higher opt-out rate among older eligible savers is that these savers have reservations about the benefits of saving when starting saving at this (perceived) late stage in life.

Those opting out seem to be overlooking the fact that they are passing up on, what is effectively, ‘free money’.  This free money arises from both employers’ contributions and the tax relief these savers enjoy on their own contributions.  Employers’ contributions seem to be a material contributor to older savers remaining enrolled, with 59% of those over 50 citing employer contributions as a reason for not opting-out compared with 50% for the whole population of savers.  Clearly, the benefit of employer contributions is no secret.

The changes announced in the 2014 Budget mean that savers over 55 can access their accumulated savings relatively easily from April 2015.  There are consequences arising from encashing pension savings, primarily related to tax relief on future contributions as well as tax paid on benefits taken, but any amounts saved by those over 55 are not necessarily locked-up for long periods of time.  Admittedly, some pension funds might not offer such access facilities due to operational considerations so there might be a practical lock-up. 

Affordability might well be the driver for opting-out.  Pension saving becomes more challenging as income falls, with 49% of those earning less than £15,000 p.a. citing affordability as their reason for opting-out compared to 30% across the whole group of those who have opted out.  NEST does not provide a breakdown by age group for opt-outs related to affordability so it is not possible to analyse this issue specifically for those over 60.  There is short-term pain involved in the saver reducing his/her take-home pay, by paying contributions, to unlock the employer contribution and tax relief.  However, how many other decisions are going to yield a 150% return (based on current minimum employer contribution rates of 1% and tax relief of 0.2% compared to the saver’s contribution of 0.8%) to savers?

Most UK savers have not saved enough to provide themselves with the standard of living they wish for in retirement.  Auto-enrolment is providing savers with an opportunity to close this provision gap on attractive terms, given employer contributions and tax relief.  Both these sources of additional benefit are set to rise in absolute terms in 2017 and 2018 too, accruing irrespective of the saver’s stage of life.  Why are older savers, in particular, passing this free money up?

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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4 Responses to “Free money”- why do those eligible for it- not want it; guest blog from Ralph Frank

  1. Alan Chaplin says:

    I can think of a couple of reasons;

    1 – they do not realise the “free” money is there
    2 – they do know but don’t trust the “system”. Someone offering to pay you £100 in the future for £50 today is not a good deal if you suspect they will waste/steal your £50 and you will be lucky to get anything back.
    Linked to the second point is the irony that maybe the message of “if it looks too good to be true, it probably is” is actually getting through and communicating AE employer conts as “free” money falls into this category??

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    • henry tapper says:


      It’s worrying if people see employer contributions this way

      The consumer section of NEST Insight 2015 is quite helpful on this. Most older people who opt out don’t see the point of having a tiny pot. Will Freedom and Choice change this- it ought to!

  2. betty fyffe says:

    If someone is on minimum wage and a pension contribution is not taken into account in determining what that minimum wage level is, then of course they will opt out. While 40% + rate taxpayers etc. get tax relief at their highest rate….it’s not rocket science to work out how to help those save for pensions who most need it

  3. betty fyffe says:

    In case it was not clear, I meant that the employee’s contribution is not taken into account in determining the minimum wage that employee receives.

    Plus, you may be surprised at the amount of people who are older and who are now on the minum wage.

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