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?