Auto-enrolment is now a no-brainer
20 May 2014
- New Budget flexibilities dramatically increase appeal of pensions auto-enrolment
- Opt out rates should fall significantly
- ‘Buy-one-get-one-free’ deal too good to miss for most
The Pensions Policy Institute has today published new research highlighting that auto-enrolment is now far more attractive than previously expected.
Opting out of auto-enrolment is turning down free money: Even for older workers, who were the group least likely to benefit from staying in their employer’s scheme, the flexibilities introduced to pension savings in the 2014 Budget will mean those who do opt out will be turning away free money. As the PPI says, unless they are really in dire straits, it is hard to see why they would want to refuse their employer’s pension contribution and the tax relief.
Pensions are far more attractive now so opt-out rates should be much lower than expected: The new flexibilities in the UK pension regime will dramatically increase the appeal of pension savings and employers should be prepared for much lower opt-out rates than they might previously have budgeted for.
Older workers will be first to benefit: As workers will all be entitled to take their pension funds as cash from April 2015, if they want to, the pension savings under auto-enrolment have become significantly more attractive, especially for older workers who could be the first to benefit from the pension reforms.
Taking the funds as cash removes the previous risks to older workers: The new rules remove the problems of pension saving for older workers, who might previously have been at risk of either just tipping over the old limits for cash withdrawals. These ‘trivial commutation’ and ‘small pots’ limits will be swept away in 2015, so pension savers will be able to take their auto-enrolment pension fund and spend it if they wish. In addition, there were previous concerns that older workers would find their pension income resulting in lower means-tested benefits, but now that they will be able to take their fund as cash and spend it, it will not need to count against their means-tested benefits. In any event, fewer pensioners will be subject to mass means-testing, as the new state pension rolls out after 2016, so the amount of money built up in an auto-enrolment pension fund will be more likely to improve people’s retirement finances.
Auto-enrolment offers a ‘buy-one-get-one-free’ deal: Therefore, any workers who do opt out will be turning down free money from their employer. The auto-enrolment regime offers a ‘buy one get one free’ deal on pension contributions. For each £1 the worker puts into their workplace pension scheme, another £1 goes in (75p from their employer and 25p from the tax relief). Unless they have huge debts, it will normally make financial sense to remain in the scheme, even at older ages – or perhaps especially at older ages – because they will be closer to the point at which they can access the money if they need to. If they do not put that £1 into their workplace pension, they will not get the extra 75p from their employer, nor the 25p tax relief. Indeed, even non-taxpayers can benefit from the tax relief and can request to join their employer’s scheme.
Employers should be prepared for majority of workers to stay in: The new rules will be a gamechanger for future pension contributions under auto-enrolment and employers will need to be prepared for the vast majority of their employees to decide to stay in.