Opting out of a pension should be avoided at all costs, but with compressed wages and rising living costs, many will do so regardless without alternative solutions
Nearly nine years ago after finishing university, I started my first job in journalism in Edinburgh, aged 22.
It paid a paltry figure well below £20,000 a year, but as someone with no formal journalism training, no work experience in any newsroom of note and Government warnings of a deep recession ahead, I decided it was best to take what I could get, in the hope it would boost my CV and give me a chance to climb the ladder in the future.
After accepting the job, a lot of financial considerations came to mind – how easy would it be to live in a notoriously expensive city while on essentially the minimum wage, how could I source a car – a requirement for the role – and what extra costs would I now face now no longer a student – council tax being a key one.
One thing that did not cross my mind at any point, was how I would save into a pension.
Under auto-enrolment rules, everyone over the age of 22 who is classed as a worker and earns over £10,000 a year automatically pays 5 per cent of their earnings into a pension, with their employer topping this up with a 3 per cent contribution.
When I started my career, these rules were being phased in and my own employer started to offer a workplace pension from a few months after I joined.
It’s often said that forgoing your workplace pension is like opting out of a pay rise, because by doing so you stop your employer’s obligation to pay into your pension too.
But to someone putting very little cash aside as savings, the idea of squirrelling money away that I would not be able to access for four decades seemed unnecessary. That’s why when given the chance, I opted out.
My admittedly unideal decision-making didn’t even stop here. When I moved to London a year later, I opted out again. On a salary in the mid £20,000s and now paying an eye watering amount for rent, having an extra bit of cash each month – no matter how small – still seemed preferable to having it in inaccessible investments.
In fact, I only actually started opting in to my pension at the start of 2019, nearly three years after starting the world of work.
Any pensions expert will probably read the above with a shake of the head. It goes against all conceived wisdom.
But lots of people do the same. In fact, figures unearthed in 2024 even show that those working in the public sector with generous so-called “gold-plated” pensions are opting out more and more.
Sadly, the figure could well get worse. Although the minimum wage is rising, there is wage compression at the lower end of the salary scale.
A report by the Resolution Foundation earlier this year found that graduate salaries are lower in real terms today than they were in 2001 and are heading for parity with the minimum wage.
And a report by the Living Wage Foundation found that 2024 saw the largest annual rise in number and proportion of low-paid jobs ever recorded.
Particularly for those having to move to expensive cities including London, Oxford and Edinburgh in search of work, it means a struggle to get by.
Paying into a pension, as important as it is – and for anyone reading this and considering opting out, it really is important – is likely to be seen as a “nice to have” for many, as they consider their priorities.
It’s part of a number of financial rules that young people are taught, that while they constitute solid advice on paper, are actually increasable difficult to follow.
Guidance like, “Never spend more than 30 per cent of your income on rent” constitutes another golden rule that flies in the face of what is achievable for many.
I’d have preferred to have paid into a pension in my early twenties, but now that I earn more and contribute above the minimum rate, I’m confident that I can build comfortable retirement savings.
Though I’d probably opt in earlier than I did, I can’t honestly say that I’d make a different decision to the one made by 22-year-old me – I’d probably opt out again.
And knowing that I’d do that, I know that no matter how much we drill into people that opting out of your pension at all costs is a bad choice, many will sadly do so.
It’s why the solutions to the problem likely need to come from policy.
Organisations like the Institute for Fiscal Studies (IFS) have argued that there is a strong case for mandating employers pay into their staff members’ pensions even if they themselves opt out.
Others have suggested increasing the amount employers contribute from 3 per cent, so when people do get the chance to opt in, more money is put away.
While adding extra burden to employers at a time when they are already being hit by additional taxes is unlikely to be politically savvy, our policy makers need to think about what the consequences of inaction could be.
In the meantime, if you have opted out, don’t wait for politicians to improve the situation. Opt in as soon as it is viable for you to do so, and consider increasing your payments from the minimum if this is something you can afford.
Your future self will thank you.
