Why young people MUST opt in to workplace pensions

ReenaSewraz
by Lovemoney Staff ReenaSewraz on 06 August 2012  |  Comments 24 comments

Auto enrolment poses a real opportunity to finally engage young people about pensions - a subject that has fallen out of tune with their needs.

Why young people MUST opt in to workplace pensions

The first staging of automatic enrolment will begin in October. Yet despite there being a lot of chat about it in the financial press, no one my age seems to know anything about it.

That will all change though and in the next five years every UK worker over the age of 22 (but under the age of retirement) and earning more than £8,105 a year will have to be enrolled into a pension scheme with their employer.

Personally I am jumping for joy. That’s because finally there is an opportunity to engage in a conversation about pensions for young people. I believe it’s a conversation long overdue.

Out of sync

Pensions sound hideously complicated to someone of my age. The jargon is a real barrier. Phrases like defined contribution, defined benefit, and stakeholder pension make my eyes glaze over.

Plus for a twenty-something struggling to manage money in the here and now, thinking about old age income seems irrelevant. I tend to wrongly associate pensions with being old, not with being young.

I know I am not alone in this disconnect with the reality. Attempting a conversation with my friends and boyfriend about pensions sees the subject quickly dropped or the issue is set aside for when we are in our thirties and earning more money.

Opportunity knocks

But now with auto enrolment there is a real opportunity to dispel some of the myths young people have generated to prevent them from thinking about funding their retirement.  

Those clued up on pensions know that the young stand to benefit the most from this scheme.

So why would someone in their twenties choose to opt out?

Other concerns

Personally I have big concerns about my student debt (currently £19,356 the last time I checked) and saving for a house with my partner.

Friends are struggling with overdrafts, student debt, credit card bills and sky-high rent.

Arguably my generation have bigger concerns to deal with now, than worrying about a pension we won’t have access to for years.

The monthly cost

Another worry I am sure will be playing on the minds of most twenty-somethings is: how much is this going to cost me?

The contributions are split into three phases, slowly building up the amount workers, employers and the Government (through tax relief) have to contribute. This is what the phasing will look like.

Timing

Worker contributes

Government tax relief

Employer contributes

Minimum total percentage that goes into the pot

October 2012 to September 2017

0.8%

 0.2%

1%

2%

October 2017 to September 2018

2.4%

0.6%

2%

5%

October 2018 onwards

4%

1%

3%

8%

But those who budget to the penny will want to know exactly how this will impact their weekly or monthly pay. You can check how much is likley to be missing from your wages using thesalarycalculator.co.uk and entering the percentage of worker contributions along with your income details.

This is what the contributions of someone in my circumstances, working for an employer joining the scheme from day one, will look like:

Phase

Minimum contribution from me*

Monthly cost

2012-2017

0.8%

£13.33

2017-2018

2.4%

£40.00

2018 onwards

4.0%

£66.67

*These figures are post tax

The initial payments don’t bother me - I can handle £13 - but I’ll admit £66.67 a month does sound like a lot. That’s £800 a year that in the right savings account could help with a deposit for a home or to help pay off debt that has more immediate consequences.

The Government plan is to ease us into saving so we don’t opt out, but I think many will overreact to having to part with extra money that they believe they could find a better use for.

Why I’m in

That said I won’t be opting out.

By sticking with my enrolment and learning to adjust I could be safeguarding my future and benefitting from the miracles of compound interest plus extra money from the Government (through tax relief) and my employer.

Saving younger will mean returns will be greater than those who choose to start later in life. I could delay my contributions until I have tackled my debts and bought a house. But let’s face it that could take a lot longer than five years and the longer I delay the more I lose out on.

To illustrate thanks to some number crunching from NEST, based on my age and salary if I were to stick with auto enrolment (with the full contribution of 8%), by the time I retire I would have amassed a total of £134,000 in my pot.

Broken down that equates to £35,000 from me, £26,300 from my employer, £8,760 from the Government in tax relief and £63,940 from the growth of the investment. This means when I get to 68 I will be able to get a tax free lump sum of £33,500 and a possible retirement income of £5,530 in addition to my state pension.  

But if I opted out and delayed it by ten years the pot shrinks to £86,200, making my tax free lump sum £21,500 and a possible retirement income fall to £3,640. Delaying means there is less time for contributions and less time for compound interest to work its magic.

Of course a pension is an investment so the actual pot that someone ends up with is hard to determine exactly. Fees and inflation will also impact what the total saved will look like in 40 years times.

Making it work

My generation had little control over what has happened to education, housing and the jobs market. But auto enrolment is the chance to take real responsibility for our futures.

I don’t think young people should opt out. But I can completely understand if they did.

One pensions journalist recently suggested we need someone to revamp the whole industry with a Jamie Oliver-type ambassador and I completely agree. There needs to be a rebrand of pension savings. Someone needs to help drum home the message that pensions are for the young.

I hope as we get closer to the deadline, a bit more will be made about auto enrolment targeted at my generation just so it is given a fighting chance to triumph.

In the meantime, you can find out more about the process in this article auto enrolment: your salary will fall by £300 per year from October. Also try our Q&A section to get some advice from the lovemoney.com community or visit the Pensions Advisory Service website to find out exactly when you are likely to be affected.

More stories on pensions:

One in five has no pension savings

Six steps that will treble your pension

Auto enrolment: should saving for a pension be compulsory?

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Comments (24)

  • I was robbed.
    Love rating 1
    I was robbed. said

    If you save for a pension there is a good chance you will lose a large chunk of your savings due to some small print or scam. If you do not save you will be looked after by the nanny state and be no worse off so my advice after my experience with Equitable Life and the two governments doing everything possible not to compensate for their FSA's failings is to forget it. I lost around £28,000

    Report on 06 August 2012  |  Love thisLove  1 love
  • CaptainFlak
    Love rating 32
    CaptainFlak said

    How can you opt in to something if it is automatic?

    Report on 06 August 2012  |  Love thisLove  2 loves
  • grayfield18
    Love rating 1
    grayfield18 said

    Your in unless you opt out !! I certainly would advise my son to remain in.

    As an employer i would also encourage my younger staff to opt in too.

    Report on 06 August 2012  |  Love thisLove  0 loves
  • Mike10613
    Love rating 626
    Mike10613 said

    The government encourages (or forces) everyone to save for retirement and then devalues the money they save. What an outrageous scam, it's fraud on a grand scale. They will keep printing money to pay for grandiose schemes like the Jubilee and Olympics and showing the world what a great nation we are. It's like the fraud with the Iphone, smart suit and the Rolex watch by the guy who doesn't have 2 half-pennies to rub together; who then goes out and buys a BMW on the never-never hoping his next pay rise will help pay for it. But it seems there won't be any more pay rises and this is no longer a great nation, we can't make anything useful. It's all about confidence and perceptions now, just keeping up appearances and not mentioning the food cupboard and bank account are both empty.

    Report on 06 August 2012  |  Love thisLove  4 loves
  • russbiker
    Love rating 70
    russbiker said

    @I was robbed: relying on the state means subsistence income at best. You also have no way of knowing what state benefits will be in the future: the government are rightly trying to reduce the welfare budget.

    It's the responsibility of everyone to look after themselves and not sponge on the state (ie. everyone else).

    Report on 06 August 2012  |  Love thisLove  2 loves
  • JoeEasedale
    Love rating 174
    JoeEasedale said

    I will be opting out. The whole thing is a scam. The operator will extract charges wether or not the fund actually makes any money or not, and the government is printing money, thus devalueing the pension pot as well. Then, after saving it for umpty ump years, the money is given away to an insurance company who drip feeds a bit of it back as a pension, then when I die, the insurance company keeps the balance.

    No thanks - a cash isa will provide tax relief on the interest, will be tax free to take out, unlike a pension, and if I need the capital I can have it back, unlike a pension. Any left I can leave in my will to my family, unlike a pension.

    With the death of the final salary scheme which was superb, pensions belong in a museum along with the dinosaurs and other extinct forms.

    Report on 06 August 2012  |  Love thisLove  2 loves
  • grelly
    Love rating 27
    grelly said

    I've said this before, but one more time...

    If the Government wants people to save for their retirement, it needs to introduce legislation that limits the amount that providers can charge. In these days where computers do most of the work, a charge of more than (say) 0.5% is unjustifiable.

    Grelly

    Report on 06 August 2012  |  Love thisLove  3 loves
  • anonyy
    Love rating 18
    anonyy said

    I do agency jobs it won't work for us. I don't agree with it at all. If u are on minimum wage,it won't work for them either.

    Report on 06 August 2012  |  Love thisLove  1 love
  • derge
    Love rating 3
    derge said

    I agree with Joe, and can speak from experience; being 57 and having just had my state retirement age raised from 60 to 67 in one swift move. Probably cost me £10,000 straight off. Then my pension fund which I contribute £300 a month to has just given me a statement showing that my pension from them at 65 will be £1500 per year arising from a pot of £45,000 - assuming I live to my actuarial death date of 85 I will receive £30000 and the pension company will keep the rest. Well you might argue, they have costs. However I already cover all their costs through hidden transaction fees, etc. My statement showed NO costs at all. However, if I pay £3600 a year in to an ISA between now and 65 I will have £28000 to play with TAX free, plus any interest accrued. Yes I will have to watch out for the fees, and finding a good interest rate is tricky but they are out there if you look hard enough. I also have 20 years in a company pension, with quite high contributions made when I was younger and it is not worth the paper it is written on.

    Report on 06 August 2012  |  Love thisLove  3 loves
  • Severian
    Love rating 6
    Severian said

    Until the government change the current pension rules on minimum income guarantee and introduce a flat rate state pension, the best financial advice is to NOT join the NEST scheme. This is particularly true if your final pension pot is going to be less than £250,000.

    The other problem Reena hasn't highlighted in this article is that the government are constantly changing the rules, so putting all your money into NEST is very very risky. They just changed the rules on SERPS opt-outs which means for some groups (like me) the State pension is going to be much worse than I would otherwise have got.

    Pensions are such a long term saving they are highly risky and prone to government interference, particularly in the future once lots of personal wealth has been built up in NEST. I expect them to abolish tax-free lump sums at the very least, just so they can get their hands on your life savings.

    Report on 06 August 2012  |  Love thisLove  2 loves
  • GMG1950
    Love rating 4
    GMG1950 said

    Yes the government keep changing pension rules, but what makes you think ISAs will be around in their same form 10 or 20 years from now. Use both if at all possible. Remember also you need self control with an ISA. Pensions you can't dip into whenever you want. And also even if your savings are not huge when you retire, they are still better than nothing or expecting to live of others through benefits which may or may not exist.

    Report on 06 August 2012  |  Love thisLove  1 love
  • Basia02a
    Love rating 49
    Basia02a said

    Pensions are structured to make money for the giants such as Standard Life and Legal & General. Sipps are now a reasonable way to save for old age. My other half, recently retired, highlighted the differentials. She had a £40,000 AVC pot with which she bought an annuity. After her lump sum, £30,000 was kept by the annuity for ever, and is now generating the same income as a £10,000 investment in Share Funds. The annuity, not inflation linked, is of course safe. People in their 20s will be saving for somewhere to live, a more immediate concern than a pension 40 years away.

    Report on 06 August 2012  |  Love thisLove  0 loves
  • denprout@yahoo.co.uk
    Love rating 2
    denprout@yahoo.co.uk said

    At 18 my husband took out a pension on advise from his uncle. At 61 I dread to think how much he paid into it but he has been royally stuffed by the governments and companies inept dealings. We have a lot of friends in the same position. Would he do it again, NO!!

    Report on 06 August 2012  |  Love thisLove  2 loves
  • Tanni
    Love rating 92
    Tanni said

    Totally agree with denprout@yahoo.co.uk; pensions as a concept are great and very good to safe guard a good standard of income and living in ones' old age. However most pensions are not bearing the fruit for those pensioners. I have a pension and I know it won't be great to rely in this for my retirement. Would have been better to put my funds in a group property buying portfolio rather than a pension.

    Pensions are financial products which the governments raid and appropriate funds from. Pensions are the extra source of guarantee income to large firms to raid and appropriate money from our pension pots so that employers, insurers, banks have a cheap source of funding which they can lend back to us as loans. What a scam and people will soon wake up.

    Most persons of salaries of over £150,000 and above will have more high returning pensions, but the vast majority will either get very little in return due to inflation, theft, appropriation of funds and poor investments and high fees by the fund management firms. Do not forget that the age pf retirement always seems to get higher by five years every other decade so do not expect to ever cash in your pension as many people will have sadly passed away by the time our ages reach the pensionable age. Many can get ill and Try for early retirement but do not count on your employer letting you go that easy. I knew of a woman who was in her late 40s ar early 50's. She was ill and asked for early retirement from her local authority job that she did from the age of leaving school. it took the local authority over 2 years to resolve this and she died whilst still an employee. poor lady never got the planned early retirement as her pension was out of her control and so are everyone else's.

    Just watch the pension meltdown that is around the corner for everyone. Think about it; the banks are bust, business is stalling, government is cutting back on stimulating employment and infrastructure, government is cutting the benefits and returns on the money it borrows and lends, NHS is being cut back....the standard of living and quality of life is on a downward spiral. Less people in work then ever before, less people paying into pensions....as a business model the ponzie pension schemes are coming to a bitter end for many, just wait and see.

    Report on 06 August 2012  |  Love thisLove  1 love
  • martbabs
    Love rating 1
    martbabs said

    I have just received a statement from what is left of Equitable Life. If I retire at 67 I can expect a pension of £130 a month. What a terrible return on the £65k+ that I invested during my 20s and 30s. I paid this money in during the years when my children were growing up and my wife worked to help pay for our "prudent investment". She should have stayed at home with her beloved boys and we could have had a couple of good holidays and built up ISA's with that money.

    I feel that I have been robbed and no one cares: The FSA, The Pension "Industry and The Politicians have washed their hands of The Equitable Scandal and believe me, they will all do it again to protect their bonuses, jobs and reputations

    Don't do it young people!!!!

    Report on 06 August 2012  |  Love thisLove  1 love
  • Tanni
    Love rating 92
    Tanni said

    Martbabs; this is a coordinated financial conspiracy with the full blessing of the toothless FSA and regulators. Shame they are after the young ones' now.

    Report on 06 August 2012  |  Love thisLove  1 love
  • deanrobinson78
    Love rating 20
    deanrobinson78 said

    I find it strange that a lot of people above are recommending that young people do not save for their future.....and rely on their children and grand children to support them. What if the government was proposing that young people could opt out of paying part tax and part NI - the implication of which would be that they did not get any state pension? Or even better your parents didn't.

    The government are not, and will never be able to balance the books. In this country (as in most who don't sit on a pond of oil) it is always going to be a robbing Peter to pay Paul situation.

    Young people need to read up and decide for themselves. In some situations not paying into a pension and saving for a deposit may be better. But people THIS IS FREE MONEY for the individual. Read above, the government and employer pays too.

    I guess I am lucky at 33 to have an employer who pays 6%, and I pay 8%. With a pension pot of 70K now I intend to keep paying into that. When I retire I want to have money, and my partner to have money even if the government don't provide it. I may be annoyed at the charges, and the change in age / rules / but do i want to risk scrapping a living in my 70s? No thanks.

    P.s. My partner has 10% forcible taken from her - End of salary pension with a certain government employer. She gets no option - it just happens and she has to live with it.

    Report on 07 August 2012  |  Love thisLove  0 loves
  • mambach
    Love rating 37
    mambach said

    Nice thought - for anyone who still gets a salary above £8105. How many people actually qualify for this?

    Many folk I know who work (so non of the students or ex-students who don't count for any count apparently) are self-employed - they work for an agency, are contracted for zero hours and then get paid hours they work. Much of the public sector is moving this way - most FE teachers are paid like this; nurses have been for a while; rubbish collection; any kind of clerical function is outsourced in this way. Chunks of the retail sector also pay this way - possibly contracting a minimum number of hours.

    From the point of view of an employer, this is brill. Someone gets sick, pregnant or old : you don't pay them. Too many staff? Just tell them not to turn up tommorrow. Big order? Hire three more goons starting tommorow. Its not your job to find qualified people - after all, there are dozens more where they came from.

    From the point of view of the employee, you get to eat on a daily basis, and keep a roof over your head. Even a few luxuries like the odd glass of beer - if you work the overtime for it.

    Said young people at whom scheme is aimed are least likely to be able to participate. Oh and when anything does go wrong, you will be expected to cash in your pension before getting any kind of benefits, so even if you can, don't bother.

    Report on 07 August 2012  |  Love thisLove  2 loves
  • CuNNaXXa
    Love rating 410
    CuNNaXXa said

    I find it ironic that the minimum wage is over £12,000 a year, while the qualifying wage for this pension scheme is £8,105, meaning everyone earning a main wage will be taxed, unless you opt out.

    I also find it ironic that you are taxed twice, because NI contributions are supposed to be for a state pension, among other things.

    Oh, and before anyone says that we should all save, I have been saving for twenty years or more, and have seen most of what my employers and I paid in evaporate away. After saving thousands, my pots are worthless.

    Lets be honest, while it sounds fantastic that people are being encouraged to save for their future, our leaders have a knack of raping the system, or devaluing sterling, and if they aren't raping the system, the pension administrators know every trick in the book.

    To sum up, no one in their right mind would run a pension scheme unless they could profit from it, and insurance companies ensure their profits are healthy.

    During the height of selling PPI, salesmen were encourage to sell more PPI due to incentives, such as games like MineSweeper. Basically, every time you sold PPI, you could ring a hotline and quote a coordinate, and if you hit a mine, you got an additional £100 bonus. Another game was Battleships, where you could earn up to £500. No wonder salesmen were pushing PPI like there was no tomorrow.

    Anyway, now that PPI has basically sunk, the insurance companies are looking for the next angle, and pensions are the next target. So, everyone in the county HAS to provide for their future. Oh, what a target for the insurance bods.

    Of course, many people will get very rich. Mind you, how many years will pass before we can think of suing for being mis-sold pensions? That will be the next big rip off, which we will have to fund again.

    Report on 07 August 2012  |  Love thisLove  1 love
  • yocoxy
    Love rating 152
    yocoxy said

    I hope any young people coming here for money advice ignore the cynicism and misinformation of the previous two posts.

    My wife has a clerical job and earns more than the minimum working part time. My son is in a call centre and is full employed on more than this. Both will opt in because it is extremely poor advice not to.

    Report on 11 August 2012  |  Love thisLove  0 loves
  • Supercal
    Love rating 3
    Supercal said

    Firstly, it's not 'tax relief', it's tax deferral. Secondly, it's deferred means testing. No form of savings is easier for the government to tax, and harder for the citizen to avoid than pensions. The 'debate' here is therefore on a false premise.

    Report on 12 August 2012  |  Love thisLove  0 loves
  • bparsons
    Love rating 2
    bparsons said

    So you can deduct money from a minimum wage salary to go into a government run pension pot but useful schemes that could actually improve a persons standard of living today, such as Childcare vouchers, supermarket voucher & cycle schemes are not available to low paid workers? This seems a little bizarre to me.

    Report on 10 September 2012  |  Love thisLove  1 love
  • wiliamson
    Love rating 4
    wiliamson said

    We had the best private pension scheme in the world until the politicians meddled with it. Now they are attacking public pensions so we can all be equal in the gutter. Money in savings is evaporating in value, interest rates are nearly non-existent, and that interest is taxed. And now the govt is coming back for more. Save into pensions so that we can rob you again? I paid into an employer pension for the last 20 years. My retirement age has just been put up to 63, and I will be on the lower rate pension. If myself and my employer had not bothered, (my employer has a pension deficit - like most) I would be entitled to pension credit and be better off.

    Report on 21 September 2012  |  Love thisLove  0 loves
  • Ginnymay
    Love rating 39
    Ginnymay said

    I took out a stakeholder pension for my daughter 3 years ago when she was 19. She will graduate this year, though is unlikely to walk into a well-paid job, if her contemporaries are anything to go by. What will happen to her stakeholder pension when she IS employed - will she automatically have to enrol in an employer pension scheme, or can she continue with the contribution to the stakeholder pension, which I had envisaged her taking over from me once she is earning? Would she be able to get the govt tax relief on a stakeholder pension if she does not join the employer scheme, does anyone know? Or would she be better off ditching the stakeholder pension (which I took out to maximise this "miracle of compound interest" by starting it when she was young)

    Report on 31 December 2012  |  Love thisLove  0 loves

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