Why are so many older workers rejecting free money?
28th September 2014
Huge numbers of over 60s are opting out of pensions auto-enrolment, losing their employer contribution
Budget pension reforms make pensions a no-brainer for most older workers as they can simply take the cash if they want to
Need for financial education and advice greater than ever
Figures just released show that nearly all younger workers are remaining in their employer pension scheme after being auto-enrolled, but many older people are opting to leave.
According to NEST (the National Employment Savings Trust) 28% of over 60s are opting out of auto-enrolment, while only 5% of under 30s are turning away from pension saving.
As this week marks the second anniversary of the start of auto-enrolment, it is certainly encouraging that so many are staying in, however it is worrying that the older workers, who will benefit soonest from their pension savings, are not taking advantage of the free money from their employer.
So why are so many older workers deciding to opt out? I can suggest some possible reasons:
- Fear it’s too late to put money into pensions: Many older workers may not have any pension savings at all and may feel they have left it too late. Perhaps they have always heard that it is best to start saving early, so they feel they cannot benefit, while younger workers still have many years of saving ahead of them. However, it’s never too late to save and auto enrolment is a very attractive proposition for most people. Indeed, especially for those who do not yet have much pension saving, staying in auto-enrolment should be beneficial.
- Don’t realise that auto-enrolment means ‘free’ money: Under the terms of auto-enrolment, every £1 that workers contribute to their pension immediately doubles to £2 (less charges) – with the extra £1 coming from their employer and the Inland Revenue tax relief. There is no other savings product which doubles your money on day one. Those who opt out are rejecting ‘free’ money.
- Don’t realise the Budget reforms mean they don’t have to buy an annuity and can spend the money freely: Perhaps the over 60s don’t realise that the Budget changes mean they can double their money and then should be able to take the cash out and spend it after April 2015. As they will no longer have to buy an annuity, or drawdown, they will usually be better off if they stay in
- Fear of means-testing penalties: Some older people may be concerned that having money in a pension will affect their ability to claim means-tested benefits. Certainly, before the pension freedoms announced in the Budget, this could have been an issue, but under the new regime anyone affected should be able to take their money out and spend it, and they will also have the employer contribution to spend as well, which would otherwise be lost to them, so they are better off staying in.
- Already have good pensions: Perhaps many of the over 60s think they already have good pensions in place, so they don’t need any more. However, even if they have other pensions (unless they have reached or are close to the £1.25million lifetime limit), they would normally be best advised to stay in as they are turning away free money by opting out.
- Distrust pensions: Perhaps the older workers distrust pensions so much, after hearing about or experiencing some of the scandals in recent years and this has put them off pensions altogether. Younger workers may be less directly affected by these. It is also the case that new-style pensions are much better value than many older pensions.
- Can’t afford pension contributions: Some older people may feel they need every last penny of their salary and cannot afford pension contributions, however, it is difficult to imagine that so many more older people are struggling than the under 30s, where opt out rates are so much lower. Therefore, this is unlikely to explain the large age differential in opt out rates.
- Don’t believe the reforms will last: Maybe the older workers are more cynical than the young and don’t trust the Government to leave the pension reforms in place, fearing that the freedoms will not last. They may be afraid of being unable to take the money out, or being forced to buy particular products again in future, having seen so many pensions policy changes in the past.
So, if they don’t trust pensions, or don’t trust Government policymakers, this could explain the high opt out rates. It will, therefore, be important for Government and employers to help their older workers understand the benefits of pension saving and the risks of opting out of auto-enrolment if they want to reach those coming up to retirement soonest. Improving financial education would clearly help too. Of course, anyone who is unsure about their position would benefit from taking independent financial advice, but for most older workers, the employer contribution coupled with the Budget pension reforms make pension savings a ‘no-brainer’. Assuming nothing else changes!