Brits have been handed some urgent pension advice, as Martin Lewis warned that individuals might be “throwing away free cash” by not maintaining their workplace pensions. Writing for his site Money Saving Expert (MSE), Martin underscored the significance of keeping up with your workplace pension contributions.
He warned against opting out or reducing payments, labelling such actions as a “bad idea” because it could lead to missing out on crucial employer contributions to your pension pot. Martin clarified that employees aged between 22 and 66 who earn more than £10,000 are automatically enrolled into a pension scheme.
“In other words, you are ‘opted in’ to contributing without being asked,” he explained. “I’m a supporter of this as it pushes people into good financial behaviour and, crucially, because if you’re opted in, your employer must contribute too.”
The money-saving guru detailed that the minimum total contribution is eight percent on earnings between £6,240 and £50,270, with employers required to contribute at least three percent of that amount. However, some employers may choose to contribute more.
“This is a huge boon,” Martin emphasised. “It means it pays you more in total (though of course, your disposable income is less due to your contribution).”
To illustrate the benefit, Martin provided an example. If you put £100 into your pension, your employer adds £60, making a total of £160 going into your pension pot.
He highlighted the added advantage of tax relief, saying: “Yet due to the tax relief, this only costs you £80. So that’s double invested compared to what it costs you, and this is accelerated for those on higher tax rates (I’ll leave you to decide whether that’s fair or not).”
He then cautioned against the temptation to increase current take-home pay by reducing pension payments. Martin advised: “Beware ‘opting out’ or even just dropping contributions.
“Opting out is usually a bad idea, as you’re throwing away free cash. See my old don’t give up a pay rise blog for the very few times it may be worth considering. Even more so, you may think ‘I just want to lower my contributions’.”
He warned that lowering contributions below the minimum five percent could lead to losing employer contributions. Martin said: “Yet if you lower it below the minimum five percent, then your firm doesn’t need to contribute (many do, but they don’t have to), so check that by doing that you’re not losing all their cash.”
Martin also reminded that even those earning under £10,000 or outside the age bracket for automatic enrolment might still opt into a scheme and should inquire at work. A workplace pension is separate from the State Pension, which is based on a person’s National Insurance record.