Aegon warns of £15k pension shortfall from opting out

Aegon warns of £15k pension shortfall from opting out

Aegon has warned savers against opting out of a workplace scheme or stopping contributions in response to Covid money fears as it could lead to a £15,000 pension shortfall in the future.

Analysis from the provider, published yesterday (December 29), found even a 1 per cent drop in personal contributions or a three-year ‘pension pause’ could have a significant long-term effect on retirement income.

According to Aegon, if a 25-year-old employee on average earnings, paying 6 per cent in personal contributions and receiving 4 per cent from their employer, were to stop contributions entirely but start again after three years, they could lose £15,500 by state pension age.

If this person decided to instead reduce personal contributions by just 1 per cent until state pension age, this could mean losing out on £18,400, Aegon said.

The 1 per cent decrease is equivalent to an initial reduction in monthly pension contributions of £14 from take home pay.

In addition, some employers match employee contributions, in which case this would double the loss in retirement funds to £36,800.

Steven Cameron, pensions director at Aegon, said this was a particular worry as many individuals could look to cut back on their pension savings levels in response to the coronavirus pandemic and the effect it has had on their finances.

Mr Cameron said: “The power of compound investment growth means it’s the pension contributions paid in the early years that have longest to grow and make the biggest difference in ultimate retirement income. 

“But for those closer to retirement, a small reduction in contributions can still have a big impact."

He added: “Some employees might consider ‘opting out’ of their pension scheme for a period to ease financial pressures. 

“However, it is important to understand the implications of this as they will not only miss out on personal contributions, but also lose valuable employer contributions which help to boost retirement savings.”

Back in June, the Work and Pensions committee urged the Pensions Regulator to consider helping workers who have opted out re-enrol sooner than the current three-year timeframe under auto-enrolment rules to protect their pension pot.

The committee heard evidence from David Fairs, executive director of regulatory policy, analysis and advice at TPR, that contributions paid during the pandemic could end up being particularly valuable for savers.

This is because contributions made when market values are low could see a greater increase in their value than usual if markets return to normal levels.

At the time, Tom Selby, senior analyst at AJ Bell, said: “The Covid-19 pandemic has placed huge strain on household incomes and it is inevitable some people struggling to make ends meet will have felt it necessary to opt out of their workplace pension. 

“It is crucial these people are nudged back into saving for retirement as soon as possible.”

But the Institute for Fiscal Studies previously 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.