Taking a 10-year break from auto-enrolment saving in your mid-20s could mean losing £91,600 (£119,000, €106,000) of a retirement pot at state pension age, according to Aegon.
Employees can break from contributing to their workplace pension if they choose; however, their employer is highly unlikely to carry on contributing meaning employees lose out on “free money”.
Aegon also found a break of one year could mean losing £7,300, whereas a break of five years could mean losing £42,100 of the total pension fund at state pension age.
Peter Bradshaw, director at Selectapension, told International Adviser: “Missing one year’s auto-enrolment saving is not a major issue, especially if the money is required for a specific short term need.
“However, longer periods out of enrolment have a far bigger effect on younger savers due to the compounding effect over longer time periods.
“Employers have a legal obligation to re-enrol employees every three years, so this may prove a safety net for those opting out.
“The Aegon analysis is a useful reminder of the benefits of employers’ contribution to retirement pots.’’
Employees aged between 22 and state pension aged that ear over £10,000 per year, will be automatically enrolled into a workplace pension scheme.
As of 6th April 2019, the total minimum amount of contribution that must be paid into this is 8% of earnings above £6136, with employees paying 4%, employers paying 3% and the government adding a top-up of 1%.
Individuals have the right to opt out of the scheme, but if they do, their employer is unlikely to keep contributing.
“The money which an employer contributes into your pension is a very powerful reason to favour pension saving,” Steve Webb, director of policy at Royal London, told IA. “Although dropping out of pension saving can lead to a short-term improvement in cash-flow, the money your employer would have been putting into your pension is lost for good.
“This will have a material impact on your quality of life in retirement if you give up these employer contributions for a prolonged period.
“This is especially true for those who work for larger firms who may already be contributing at more than the legal minimum”.
Reasons for taking a break
Tom Selby, pensions expert at AJ Bell, also told IA: “Most people – particularly younger generations – have a number of things competing for their money, from buying a first home to raising a family or paying off student debt.
“Given this maelstrom of more immediate priorities, saving for retirement can easily be forgotten about, which is why automatic enrolment has been deemed necessary by successive governments.
“While it might be tempting to put off retirement saving for another day, the reality is with the state pension age rising, individuals will need to take greater responsibility if they want to enjoy a comfortable future.”
Andrew Tully, technical director at Canada Life, told IA: “We need to be realistic that younger generations will be balancing various financial challenges, for example the need to pay off student debt or save for a house deposit.
“However, saving as much as you can afford from as young an age as you can is likely to give the best outcome.
“Saving into a pension, benefiting from valuable tax relief as well as employer contributions, which often match any additional employee contributions, remains the most effective way to save for retirement.”