Four and a half million people are turning down free money

by Ed Bowsher on 28 February 2011  |  5 comments
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4.5 million individuals miss out on an average of £1271 in free money each year.

You’d never turn down free money, right? You’d be mad to turn it down, wouldn’t you?

But if I told you that 4.5 million people are turning down free money every year, would you be so confident you’re not missing out?

The figure relates to pensions. Standard Life says that 4.5 million people are missing out because they don’t sign up to their employer’s contributory pension scheme. These are schemes where the employer contributes, say, 5% of the employee’s salary to a pension fund as long as the employee also contributes 5%.

Standard Life has done some number crunching and reckons that the average non-contributing employee misses out on £1,271.40 a year.* In other words, the employer is prepared to pay £1270 to the employee but the employee says: ‘no thanks.’ That’s mad!

If you invested that sum every year for 30 years, you’d end up with a pension fund of around £110,000 when you retired.** If you included the employee’s contribution as well, you’d have a £220,000 fund.

Now I can understand why people turn down this free money. There always seems to be a more pressing need for your cash than saving for retirement. I’ve even made this mistake myself.  When I first joined our predecessor site, The Motley Fool, as an employee in 2005, I didn’t sign up to the company’s contributory scheme for over a year. I had some debt that I needed to pay off and I thought it was prudent to focus on that.

But I now deeply regret that decision. Sure, if I’d signed up to the scheme from the off, It would have taken me a bit longer to pay off my debt, but I’d also have a significantly larger pension fund than I have now. Big mistake.

I did get one thing right though. When I finally signed up to the scheme, I made sure that I contributed enough to ensure that The Motley Fool paid its maximum monthly possible contribution to my pension fund.

Standard Life reckons that nearly a quarter of employees don’t take advantage of the maximum available contribution from their employer. As a result, they miss out on £790 a year on average. If they got the full contribution each year from their employer for 30 years, their pension fund would be boosted by £69,000.**

If you’re not making your full contribution, I urge you to start now.....

* Based on a UK average salary of £25,428 and a 5% employer contribution rate, the typical non-contributing employee misses out on £1,271.40 each year.

**I’ve assumed that the employee is a basic rate taxpayer and that the pension investment grows at 5% a year in real terms.