Opting out of a pension

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Saving money into a pension while you’re working is an effective way to save for your retirement. In the UK, the government considers it so crucial to financial wellbeing when you finish working that you can now auto-enrol into a workplace pension scheme. However, this isn’t mandatory, and you can choose to opt-out. 

On this page, you’ll learn everything you’ll need to know if you’re considering opting out of a pension. We also look at some alternative ways to build your retirement fund, such as investing and high-interest savings accounts.

The rundown
  • Opting out: You have the option to opt-out if your employer automatically enrols you into their workplace pension scheme
  • Opt-out period: You have an opt-out period of one calendar month if you want a full refund on any contributions you may have already made
  • Re-enrolment: If you opt-out, your employer is required to automatically enrol you back into the workplace pension scheme after three years (you can opt-out again at this time)

What does opting out of a pension mean?

The government requires employers to automatically enrol you into a workplace pension. You can choose to opt-out, but doing so means you won’t receive pension scheme benefits such as tax-free contributions and contributions from your employer.

Enrolling into a pension means that you’ll have an income from your pension pot when you retire. The main benefits a workplace pension provides is the additional contribution your employer makes and tax relief from the government.

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How do I opt-out of a pension scheme?

To opt-out of your workplace pension, you’ll need to ask your pension provider for an opt-out form. Your employer must give you the pension provider’s contact details when you ask for them. You’ll need to complete and sign this form, and return it to your employer or send it to the address provided on the form. 

If you return your opt-out form to your pension provider within one calendar month, any money you’ve already contributed into the pension should be fully refunded.

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What is the opt-out period?

You have one calendar month to opt-out of a workplace pension you’re automatically enrolled in if you want to receive a full refund on any contributions you may have already made. This calendar month starts from the date your pension provider receives your active membership, or the date the letter of enrolment from your employer reaches the pension provider. 

You may not be able to opt-out before this period starts or after it ends. If you choose to leave outside this opt-out period, you’ll have to apply to cease your active pension membership. In this case, you may not be able to get a full refund on the contributions you may have made, but this will depend on your pension provider’s rules. 

For example, some pension providers may hold any contributions you’ve made until you’ve reached the age of 55. Once you’ve reached this age, you may withdraw the contributions you made before you opted out of the pension scheme.

How long does opting out last for if I’ve opted out of a workplace pension?

Opting out of your workplace pension scheme typically lasts for three years. Your employer is obliged to automatically re-enrol you into their workplace pension scheme after this period. 

When you’re automatically re-enrolled after three years, and if you still don’t want to opt into the workplace pension scheme, you’re entitled to opt-out again in the same way as you did before. You’ll then auto-enrol again three years later, and so on. 

The main reason employers are required to re-enrol you into the workplace pension scheme is that your living circumstances may have improved over three years, and saving into a pension may have become a good option for you.

Why would you opt-out of a pension?

You might choose to opt-out of your workplace pension if you earn a low income and find it difficult to make contributions or take a monthly sum from your salary, especially if you rely entirely on your salary to pay your household’s expenses. You may also choose to opt-out if you want to pay off any debt you have, such as student loans, first. 

It’s worth considering, however, that even though opting out of your workplace pension may provide short-term financial relief, investing into a pension as early as possible will be beneficial for your retirement (however long away that may feel).

The graph below shows the number of employees with a workplace pension scheme has increased significantly since automatic enrolment was introduced in 2012, with around 78% of employees having a workplace pension in 2020.

What are the disadvantages of opting out of a pension?

When you opt-out of a workplace pension, you stand to lose out on valuable retirement benefits. These benefits include the following:

  • The additional contribution your employer makes when you enrol into a workplace pension
  • The tax relief you could receive from the government, which means your pension pot can grow more quickly
  • Any benefits your pension scheme may provide if you fall ill or are unable to work before you reach retirement age
  • Any benefits your dependants may receive in the event of your death

Alternative ways to save for retirement

Although pensions are widely regarded as a reliable way to save for retirement, there are alternative ways to ensure you have enough money to retire. 

You might want to grow your money by investing in the stock market, for example. While investing comes with risks that can lead to losing some or all of your investment value, it can also bring high rewards. If you’d prefer to avoid risking your money you might want to consider opening a savings account that offers a competitive interest rate. Fixed rate bonds tend to offer the most competitive rates of all account types and may be ideal for long-term savings goals. Plus, deposits up to £85,000 per person, per banking group are protected under the Financial Services Compensation Scheme (FSCS).

However you choose to save for retirement, it’s essential to consider all of your options to make an informed decision. If you’re in any doubt, speak to an independent financial adviser.

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