Follow:
Retirement

3 Reasons You Shouldn’t Opt Out Of Your Workplace Pension

November 19, 2017 by
workplace pension

This week I got some exciting news from my boss…

Myself and my work pals are being enrolled in a workplace pension, thanks to the government’s auto-enrolment scheme!

While I’m super excited about finally being able to save for retirement with a workplace pension, many of my friends have opted out of theirs for a multitude of reasons.

My friend Jess, for example, works for a big recruitment agency and opted out of her workplace pension last year. She decided that she’s going to build a property empire instead and use that to fund her retirement. Since Jess currently owns a grand total of zero properties and only opened a Help to Buy ISA a couple of months ago, I think relying on property might be a bit of a risky move.

From wanting to save for your first home to feeling like retirement is a long way off, there are plenty of common and understandable reasons for delaying pension savings, but I’m concerned that far too many people will live to regret their decision if they opt out. Here are just a few reasons not to opt out of the scheme if you can afford to pay into it…

You’re turning down free money

When you’re enrolled in a workplace pension scheme, your boss contributes to your pension pot too. Whether your employer’s paying just 1% of your income into your pension or matching your own contributions, this is free money that you may as well snap up.

Even if you can only afford to contribute 1% or 2% yourself to begin with, you may as well make the most of this opportunity to boost your savings with your boss’ help.

Compound interest is your mate

Are you familiar with the concept of compound interest? Basically, compound interest is the interest you earn on the interest you earn. Compound interest can make a tremendous difference to your savings and, if you start saving for retirement early enough, you may even be able to stop saving completely in a decade or two, letting the interest continue to grow your money on your behalf.

US personal finance expert Dave Ramsey has come up with the following example to show just how powerful compound interest can be:

“At age 19, Ben decided to invest $2,000 every year for eight years. He picked investment funds that averaged a 12% interest rate. Then, at age 26, Ben stopped putting money into his investments. So he put a total of $16,000 into his investment funds.

“Arthur didn’t start investing until age 27. Just like Ben, he put $2,000 into his investment funds every year until he turned 65. He got the same 12% interest rate as Ben, but he invested for 31 more years than Ben did. So Arthur invested a total of $78,000 over 39 years.

“When both Ben and Arthur turned 65, they decided to compare their investment accounts. Who do you think had more? Ben, with his total of $16,000 invested over eight years, or Arthur, who invested $78,000 over 39 years?

“Believe it or not, Ben came out ahead . . . $700,000 ahead! Arthur had a total of $1,532,166 while Ben had a total of $2,288,996. How did he do it? Starting early is the key. He put in less money but started eight years earlier. That’s compound interest for you! It turns $16,000 into almost $2.3 million! Since Ben invested earlier, the interest kicked in sooner.”

dave ramsey compound interest

We can’t rely on the government to fund our retirement

The current state pension stands at just £159 a week. Although this is better than nothing, it’s a real struggle for most pensioners to get by on this money alone.

And with many pension experts expressing concerns that the auto-enrolment scheme has been introduced by the Conservatives so that they can scrap the state pension at a later date, this is something we should all be concerned about.

If the state pension is scrapped or reduced (or the state pension age is increased again) millions of us could be left living in poverty in our old age.

TL;DR

Long story short, if you’re in a position to save for retirement, please do so. Even if you’re only contributing a small amount each month, it’s better than nothing and compound interest will help you out considerably.

If you’re really against workplace pensions (or you’re not entitled to one), I’d recommend looking into private pensions or the Lifetime ISA to see if there’s another option that’s more suitable for you.

What's the magic word?

Subscribe today and I'll send you the secret password for the free resource library. There you'll find free guides, workbooks and cheat sheets designed to transform your finances

We won't send you spam. Unsubscribe at any time. Powered by ConvertKit

Previous Post Next Post

You Might Also Like