• Opt-out levels at NEST, the pension scheme set up to support automatic enrolment, increased from 8% to 11% during the pandemic, new data reveals (https://www.nestinsight.org.uk/wp-content/uploads/2021/02/Retirement-saving-in-the-UK-2020.pdf)
• Young workers most likely to opt-out of auto-enrolment, with affordability a key factor in their decision
• Average contributions remained relatively stable although a ‘COVID-19 effect’ was observed among people who might previously have worked in more transient jobs
• Anyone who stops saving into their workplace pension scheme is turning down free money from their employer
Tom Selby, senior analyst at AJ Bell, comments:
“Given the severe financial pressures and uncertainty facing millions of families as a result of Coronavirus, it is no surprise to see the number of people opting-out of workplace pension saving rise in the first six months of 2020/21.
“While the increase in opt-outs at NEST was relatively small – from 8% in March to 11% between April and September – it is still concerning as anyone going down this route is voluntarily foregoing a matched contribution from their employer. They will also miss out on the upfront savings boost provided by pension tax relief.
“The figures suggest the young are clearly feeling the financial squeeze the most as a result of lockdown, with NEST reporting the highest opt-out rates among those under the age of 35.
“Among this age group, affordability was by far and away the most common answer given for opting out. Older workers who opt out, meanwhile, often do so because they have other sources of retirement income.”
The cost of quitting your workplace pension scheme
“Although times are clearly tough for lots of people, quitting your workplace pension scheme should still be viewed as a last resort.
“Before going down this route you should sit down and write a budget to see if there are any other areas in your everyday life you can make savings.
“For those who have seen their earnings reduced as a result of furloughing, it’s also worth remembering that your auto-enrolment pension contributions will naturally fall if your wages fall. This is because the amount you pay in is a percentage of your salary, rather than a flat amount.”
Average contributions hold firm despite Coronavirus
“The good news is that average contributions into NEST held steady despite the impact of Coronavirus, with the mean monthly contribution of £103 recorded between April and September actually slightly higher than the £101 seen in the previous 12 months.
“There was, however, a ‘COVID-19 effect’ when these contributions are split into people paying in every month (‘continuous contributors’) and those who miss at least one month a year (‘part-year contributors’).
“Among the continuous contributors average contributions were down 9% in the first six months of 2020/21, while for part-year contributors they rose 15%.
“This may reflect the impact of furloughing, with workers who previously may have been more transient now less likely to switch jobs as a result of the pandemic.”
Ethical investments deliver top performance – but 99% of members are in the default
“With focus increasingly turning to the importance of considering environmental, social and governance (ESG) factors when investing, it is interesting to note NEST’s ethical fund option delivered 5-year gross returns of over 12% - second only to the Sharia fund among the scheme’s investment options.
“However, more than 99% of NEST’s members were invested in the scheme’s default funds, which shift asset allocation as the member moves through their retirement saving journey.
“Returns in the foundation, growth and consolidation phase were 7.77%, 9.74% and 3.56%, respectively, over a 5-year period.”
