Why young people MUST opt in to workplace pensions
Auto enrolment poses a real opportunity to finally engage young people about pensions - a subject that has fallen out of tune with their needs.
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
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Comments
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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)
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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.
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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.
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31 December 2012