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Stuart Trow
The cost-of-living crisis has prompted more young workers to opt out of their workplace pensions, forgoing contributions from both their employers and the government. According to investment platform AJ Bell, 34% of workers have opted out or are considering doing so, a figure that rises to 47% for 18- to 34-year-olds.
This is the opposite of what this week’s Pensions Awareness campaign seeks to achieve. Ideally, halting pension contributions should only be a last resort given the matching contributions from your employer and the government. Yet tough economic times mean that more people, especially the young, are doing precisely that.
This is not a decision to be taken lightly, but if the alternative is escalating debt, temporarily suspending your contributions might be the least-bad option.
Ten years ago, opting in was the default option for workplace pensions. In 2012, in an effort to increase pension participation, the government introduced a subtle legislative change that made opting out of an employer’s pension scheme the default option. Nobody was forced to participate, despite the obvious financial advantages, but if people didn’t want to be involved, they had to consciously leave the plan.
By any objective measure, this has been a tremendous success. When the pandemic struck in 2020, more than 90% of eligible private-sector workers in the UK were members of workplace schemes. It’s not hard to see why: Even on the minimum setting, an employee’s contribution of 4% of eligible earnings is matched by a further 3% from their employer and 1% of tax relief from the government. Many employers even offer to match their employees’ contribution to higher levels, so it is a significant decision to forgo this “free†money.
But that is what workers are increasingly doing, pressured by the short-term imperatives of feeding their families and heating their homes.
If you are faced with such a decision, the first thing to do is to understand what is at stake and what you might stand to lose. At a minimum, if you stop contributing to your pension, you will lose the match from your employer and the government. Look closely at the scheme you are planning to leave. Many employers contribute more than the 3% minimum.
If you still conclude that, after paying for life’s essentials, making pension contributions will push you further into debt, then it might be sensible to consider temporarily suspending your contributions while you clear your liabilities. You can, after all, opt back in any time you like.
This makes even more sense if, as tends to be the case with those facing financial distress, the cost of borrowing is high. With incomes failing to match the increased cost of living, expensive debt is to be avoided at all costs and paying down balances should become the priority.
I described a number of strategies for coping with debt here, including the avalanche method of paying off the most expensive debt first and the snowball method, which involves cleaning up smaller loans and working upwards. Remember too that you don’t have to do this alone. Services like Money Helper, which provide free support on a wide range of financial issues, can guide you.
—Bloomberg