From April, the amount you'll pay into your company pension is set to rise. Harvey Jones explains why you should stick with the scheme and the dangers of opting out.
Saving enough for a comfortable retirement is a big challenge, but it will be a lot easier if you have access to a workplace pension. The good news is that more and more people do, thanks to the success of the government-backed auto-enrolment pension scheme.
This began rolling out in October 2012 and more than 10 million mostly lower paid workers have either started a pension or begun saving more as a result. It's a rare piece of positive pensions news.
Companies must automatically enrol employees on a workplace scheme, although they are free to opt out if they wish. So far, less than one in 10 have done so, which is a public vote of confidence in the scheme.
However, now comes the real challenge, because, from 6 April 2019, the amount people have to pay in is set to rise sharply. Some will feel a real squeeze on their pay packets as a result, and be tempted to pull out.
That would be a big mistake, as it could cost some people hundreds of thousands of pounds in lost pension.
Employees currently pay 2 per cent of their salary into the scheme, but from April this will double to 4 per cent and many will feel a real squeeze as a result.
Somebody earning £30,000 a year will see their annual contribution jump from £600 to £1,200, or from £50 a month to £100. That's quite a burden if you regularly find yourself scratching around for money at the end of the month.
You should stick with it, if humanly possible because if you opt out of you are effectively turning down free money.
Employers must also contribute, paying in 3 per cent of salary from April, plus you get tax relief on top. This means for every £10 you pay yourself £20 goes into your pension. You won't get that money if you opt out.
Over the years these contributions will really roll up, especially if you are just starting out on your career.
Someone who was enrolled at age 20 and earned on average £30,000 a year would build a pot worth £522,138 at age 67, assuming 5 per cent a year average growth.
Inflation means it may only be worth £205,862 in real terms, but that is still an impressive sum. Not the type of money you want to turn down.
Auto-enrolment doesn't guarantee a comfortable retirement on its own, you need to save extra if you can.
Instead of opting out, you should pay extra contributions to your company scheme, or to a personal pension or tax-free Isa.
This isn't easy, as incomes are stretched and people have so many other demands, such as everyday spending, building a property deposit, running a car, and so on.
Opting out may free up a little extra cash today but one day, you will regret it. That day is when you reach retirement—and for the rest of your life after that. You really have no option.