The Institute for Fiscal Studies has suggested savers on the lowest of incomes should opt out of their auto-enrolment pension on a temporary basis to build up a rainy day fund.
A 44-page report from the IFS, called Who leaves their pension after being automatically enrolled?, published today (March 5), claimed that in certain circumstances people may be better off opting out of their auto-enrolment pension.
The report found pension participation among the least financially secure 3 per cent of the UK’s workforce was at 90 per cent, up from 22 per cent before auto-enrolment came into force.
But the IFS has said people in this group may be better off leaving their pension, at least temporarily, to have a higher disposable income.
It said most of these people had less than £1,500 in savings and could therefore benefit from a bigger rainy day fund.
According to the IFS, circumstances in which it could be more beneficial for employees to leave a pension scheme included having high current spending needs or low standards of living.
People who were indebted with high-interest loans or were in arrears with bills, such as rent, mortgage or council tax, that may have legal consequences if not paid in time may also be better off forgoing an employer pension contributions in favour of paying off these debts first.
The IFS stated: “Those who are in severe financial difficulty are much more likely to be better off if they do not currently save for a pension (and instead use the money to boost their current consumption, pay off high-interest debts, or save a small amount in an accessible form for a rainy day), than those who are already enjoying a higher standard of living and who are much more financially secure.”
But the report also pointed out there were significant consequences to not participating in a pension scheme, and it warned the state pension would not provide an adequate income for most people.
Others may also underestimate how much they needed in retirement and spend the majority of their savings now.
While some may have a lack of understanding that the employer also makes a contribution and that the earlier you save into a pension the longer the investments have to grow in value.
Nathan Long, senior analyst at Hargreaves Lansdown, said: “Auto-enrolment has levelled the playing field for huge numbers of people when it comes to saving a pension, but there are still many people missing out.
“The fact couples are choosing to opt out of pension saving hand in hand is incredibly dangerous for their household finances and has been overlooked in analysis so far.
“Today’s report also acts as a word of warning against blanket increases to minimum pension saving levels, with some of the lowest earners actually expected to be better off pressing pause on their retirement saving over the short term.”
The IFS also published another 53-page report today looking at changes in people’s retirement expectations over the last decade, called Retirement expectations, attitudes and saving behaviour: how have these changed during a decade of pension reforms?.