Yes, you can opt out of your workplace pension.

When you start a job with a new employer, they will auto-enrol you into a workplace pension provided you meet the criteria. Effectively, there is no opt-in option.

This means that you, the employee, will pay 5% of your salary into your workplace pension, and your employer will pay 3%. These amounts can be increased by you or your employer, depending on the terms of your employment contract. Your employer may offer matched contributions up to a certain percentage, for example if you increase to X%, so will your employer.

If you no longer wish to make payments into your workplace pension, you can opt out at any time.

What happens if I opt out of my workplace pension?

By opting out of your workplace pension, you are stopping your personal contributions and your employer contributions. And there can be pros and cons of doing so, depending on your personal circumstances.

Advantages of opting out of a workplace pension

More cash now

Right now, with the cost-of-living crisis affecting many of us, we’re all trying to find ways of making our money go further. Naturally, it makes sense that by opting out of a workplace pension, we can have more money in our take-home pay each month. And for younger employees, cash in the bank can seem a higher priority than saving for retirement.

Flexibility to opt back in

Opting out of your workplace pension can be temporary. Check with your employer when you can opt in again. Generally, employers should offer you the ability to opt in again every 12 months. But some may offer more flexibility.

Disadvantages of opting out of a workplace pension

You’ll miss out on tax relief

Paying into your workplace pension gives you tax relief at your marginal rate of tax. For example, if you’re a basic rate taxpayer and want to pay £100 into your pension, it only actually costs you £80. This is because you’re refunded the 20% tax you would have otherwise paid. This is also paid into your workplace pension. If you’re a higher rate or additional rate taxpayer, the tax savings are even greater.

And when it comes to taking money out of your pension, 25% can be withdrawn tax free. The bigger your pension, the more tax-free cash you will have.

Your take home pay may not increase by as much as you think

By opting out of your workplace pension, your contributions become subject to income tax and national insurance. So, the net ‘gain’ in your bank account might not be as high as you thought it would be.

At Bippit, we like to think of a workplace pension as an extension of your salary. By making employee contributions and also getting the employer contributions on top, your salary plus pension contributions gives you a higher total wealth overall.

You’ll be giving up free money from your employer

When you opt out of your workplace pension, your employer will also stop making contributions. That’s free money that will no longer go into your pension. Think about that carefully before choosing to opt out.

You may have to save harder later

While saving for retirement seems bottom of the list when you’re young, the fact is the earlier you start the better. Pensions grow over time, so starting as early as possible means your contributions can work at their hardest.

So, if you opt out of your workplace pension, you’re potentially giving yourself more work to do in the future.

It’s hard to play catch up on your pension as retirement gets closer. This might mean you have less control over when you can afford to retire and the sort of lifestyle you could have.

Does opting out cancel my pension?

Anything already paid into your workplace pension will remain there (subject to investment performance) until you can access it at 55 years old (57 from 2028).

Usually, you’re able to transfer your workplace pension to another pension provider.

If you’ve only just joined your workplace pension and choose to opt out within one calendar month, you’re entitled to a refund of contributions already paid. This is known as the opt-out period. Any refunds beyond this period may be possible but will depend on the rules of the specific workplace pension you have.

Even if you opt out of a workplace pension, your employer will automatically enrol you back into their pension after three years, provided you’re still working for them. Your employer will contact you and if you still wish to not pay into it, you can choose to opt out again.

How do I opt out of my workplace pension?

Depending on how your workplace pension is arranged, you should be able to do one of the following:

• Complete an opt out form

• Opt out online

• Opt out by phone

If you’re not sure which options are available to you, speak to your pension provider or pension department at work.

Summary

While the focus for many of us is making our cash go further, opting out of a workplace pension should really be considered a last resort.

There are many benefits of paying into a workplace pension that outweigh the benefits of opting out.

You might want to consider reducing your contributions slightly as opposed to completely stopping them.

If you want to receive guidance and support for workplace pensions at your organisation, book a free Financial Wellbeing Lunch & Learn for your workplace.