Despite this financial pressure, most experts strongly advise against opting out of a workplace pension unless you’re facing truly exceptional circumstances.
Worryingly, recent reports show that 15.3 million people are now at risk of retiring in poverty.
Research by independent consultancy Barnett Waddingham found that 55 per cent of 18 to 24-year-olds have paused their contributions at some point, as well as 36 per cent of those aged 25-30.
Below is what experts believe should be done.
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Graham Nicoll, director of wealth at Succession Wealth, said: “Young people opting out of pensions isn’t just a bad financial move, it’s often a misinformed one.
Fahad Kazmi, lecturer in economics at the University of Derby, said blocking people from opting out was not a good move.
What is the cost of opting out?
But delaying pension contributions can come at a significant cost, Mike Ambery, retirement savings director at Standard Life, warned.
If they were to buy a lifetime income in retirement – known as purchasing an annuity – that could mean £480 less per month.
“Pensions are incredibly tax efficient, and contributions are often matched by employers, so, if at all possible, it’s worth paying in even a small amount now – it could build up and make a big difference as the years go by.”
How can young people be encouraged to save?
However, according to Susan Waites, partner at consultancy Hymans Robertson, “more could be done to reduce the number of employees that opt out or at least make sure that they fully understand the implications of doing so.”Suggestions she believes could be considered include:
Telling employees what impact opting out will have on their take-home pay and eventual pension pot. Most employees don’t understand the impact of tax relief and if using salary sacrifice NIC savings, says Waites. Promoting the benefits of pension saving to employees. This should include information about the state pension, the amount of money they might need in retirement, and how pension saving can help to plug the gap. Allowing people to raid their pension pots if needed. An employee cannot usually access their pension before 55, but Waites suggests offering the opportunity to divert some or all pension contributions to an alternative savings vehicle in certain circumstances. Allowing people to reduce their contributions for a period rather than opting out completely. Employees are generally obliged to contribute 5 per cent of their pensionable earnings to their pension, and cannot lower this amount without opting out entirely. Waites says this rule could be altered. Read More Details
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