Workers in their 60s are more likely than any other age group to opt out of workplace pensions. Data obtained by Fidelity International from the Department for Work and Pensions shows that more than one in seven workers aged between 60 and State Pension Age opted out between 2019 and 2023, consistently the highest rate of any age group.
There are various reasons why people might choose not to contribute to a workplace pension in their 60s. But how valid are those reasons? In some cases, it may not be the right decision and could cost them dearly.
The key thing many people don’t realise is that, once you’ve reached the age at which you can access your pension, you don’t necessarily have to choose between contributing and spending. In many cases you can continue paying into your workplace pension, benefit from employer contributions and tax relief, and withdraw pension money if you need it. That means many of the reasons people give for opting out don’t stack up.
Why might you opt out in your 60s?
You have serious health issues and a reduced life expectancy
If someone has been diagnosed with a serious illness and doesn’t expect to enjoy a long retirement, their priorities may understandably change.
Rather than directing money into a pension, they may prefer to have more available cash today to spend on experiences, travel or making life easier for themselves and their loved ones.
The counter argument:
By their 60s, most people will already be able to access their defined contribution workplace pensions if they wish. That means you could continue contributing while also withdrawing money from your pension if you need it.
It’s likely to be more tax-efficient to pay into the pension and then withdraw the money, because you’ll be benefitting from tax relief on your contributions and you might also be able to access up to 25% of the money tax-free when you withdraw it.
Also, if your employer pays into your pension, you’re likely to lose their contribution if you opt out. This is essentially turning down a key part of your pay package.
What’s more, pensions are often more flexible than many people realise. Most modern defined contribution pensions can be passed on to beneficiaries, meaning pension savings don’t necessarily disappear when you die. If leaving money to family is important to you, continuing to contribute could still make sense.
You already have enough for retirement
Some people reach their 60s in a very strong financial position. They may have built up substantial pension savings, have a generous final salary pension, own their home outright, and have other investments or sources of income. In those circumstances, additional pension contributions may not materially improve their retirement lifestyle.
The counter argument:
Before opting out, it’s worth checking whether doing so will actually increase the amount of tax you pay.
It’s also good to be cautious before deciding you have “enough”. Retirement can last 30, 40 years or even longer, and unexpected costs can arise. Care costs, helping children or grandchildren financially, or simply living longer than expected can all put pressure on retirement finances.
You want to access your pension
Some workplace pension schemes don’t let you draw benefits while you’re still actively contributing to that same arrangement. In those cases, people sometimes opt out in order to access that pension.
The counter argument:
While it might make sense to opt out temporarily to access your pension benefits, many workplace pension schemes allow members to rejoin after opting out. This can be a very good move as it means you could continue benefitting from tax relief and employer contributions.
Alternatively, if you have older pensions from previous jobs, you might want to access those instead. That way, you could leave your current workplace untouched and continue contributing.
You’re drawing from your pension while still working
An increasing number of people continue working beyond traditional retirement age, often on a part-time basis. Some of these workers also start taking income from their pension while they continue earning a salary. This can trigger a rule called the Money Purchase Annual Allowance (MPAA).
Once triggered, the amount that can be paid into defined contribution pensions each year while still benefiting from tax relief falls significantly – to £10,000 per year or your annual earnings (whichever is lowest). The £10,000 limit includes both your own contributions and those made by your employer.
For some people, continuing contributions becomes less attractive or requires more careful planning.
The counter argument:
To breach the £10,000 per year limit under the MPAA, you’d need to be earning about £125,000 per year, assuming you pay 5% of your salary into your pension and your employer puts in 3%. Therefore, this issue is likely to impact a very small cohort of people who are earning this kind of salary while also drawing down on their pension.
If you earn less than this but are likely to be caught out by the MPAA because you contribute a large proportion of your salary into your pension, you could simply reduce your contributions rather than opting out entirely. This is particularly important if opting out would mean you lose your employer contribution.
If you only take your tax-free cash and don’t withdraw any taxable income from your pension, you shouldn’t trigger the MPAA.
You’ve done the maths and worked out a pension isn’t the best place for your money
For most people, pensions remain the most tax-efficient way to save for retirement. However, there are some circumstances where the advantages become less clear.
For example, if you have already built up enough pension savings to expect to use your full tax-free lump sum allowance, and you expect to pay the same (or a higher) rate of income tax when withdrawing the money as you do today, additional pension contributions may offer less of an advantage than they once did.
In those circumstances, some people may prefer to direct additional long-term savings into an ISA instead.
The counter argument:
It’s important to remember that workplace pension contributions usually attract employer contributions and, in some cases, National Insurance savings through salary sacrifice, which can still make a pension the better option. Also, most people do end up in a lower tax bracket in retirement – making the pension more attractive.
You genuinely need the money now
At the other end of the spectrum are people facing immediate financial pressures. Maybe they have expensive credit card debt charging 25% interest. Maybe they are struggling to keep up with essential household bills. Maybe they are helping family members financially.
In situations like these, having access to additional take-home pay may provide much-needed short-term relief.
The counter argument:
Again, remember that, once you’ve reached the age of being able to access your pension, many providers can process withdrawals within days or weeks – although timescales vary.
For many people, continuing to contribute then withdrawing the money is likely to mean they pay less tax (and therefore have more money in their pocket at the end of the day) than simply opting out – particularly if opting out means losing their employer’s pension contribution.
You think you’re too old for a pension
Many people in their 60s think that, because retirement is only a few years away, there’s little point continuing to contribute. They assume there’s not enough time to benefit from the power of compounding and investment growth.
The counter argument:
Even at 60, you may still have many years of work ahead of you. State Pension age is currently 66 and scheduled to rise to 67. Plenty of people work beyond that point, either by choice or necessity.
Even a relatively short period of additional saving can have a meaningful impact when employer contributions, tax relief and investment growth are added together.
You don’t trust pensions
When people say they don’t trust pensions, they’re often worried about one of three things:
- They think the government might take the money.
- They think pension rules will change.
- They think they could lose everything if markets fall.
The counter argument:
This idea often comes about because people misunderstand what a pension actually is. A pension isn’t an investment in itself. It’s simply a tax-efficient wrapper that holds investments.
While pension rules do change from time to time, pensions remain one of the most tax-efficient ways to save for retirement and have enjoyed cross-party political support for decades.
As for investment risk, your pension is not one giant bet on the stock market. Pension investments are usually spread across hundreds or even thousands of companies, bonds and other assets around the world. Many workplace schemes also automatically reduce risk as members approach retirement.
Market ups and downs are normal but opting out because of a fear that pensions are somehow unsafe can mean missing out on years of employer contributions and tax advantages.
What is the cost of opting out at 60?
For some people, opting out may be the right decision. But for many workers, particularly those receiving employer contributions, the long-term cost can be substantial.
Our modelling shows that the choice to opt out of a pension at 60 could leave someone tens of thousands of pounds worse off than someone who continues contributing.
Let’s look at an example. Jane and John are both aged 60, earn £50,000, and have £300,000 in their pensions.
Jane decides to continue her pension contributions. She puts 5% of her salary into her pension, with her employer adding 3% – a total contribution of £4,000 per year between them. She does this until she retires at age 68. By that time, her retirement pot has grown to around £483,000 thanks to investment growth and contributions from both Jane and her employer.
John, on the other hand, opts out. He gets more money each month in his pay packet as a result. However, he is now paying tax on that money (which he wouldn’t if it went into his pension) and he loses the employer contribution to his pension – worth about £1,500 per year.
That means he only gains approximately an extra £2,000 per year by giving up the £4,000 that would otherwise have gone into his pension. He also continues working to age 68. By that point, his £300,000 pension has grown in value to approximately £443,000 because of investment growth alone.
Overall, his pension is £40,000 smaller than Jane’s by 68 and, over those eight years, he has only gained around £16,000 in extra take-home pay. In short, he’s around £24,000 worse off.
In both cases we assume investment returns of 5% per year after fees and that any pension contribution happens once at the start of the year – although, in reality, those contributions would likely be made monthly. We also assumed both pay tax in England.
The Government’s Pension Wise service offers free, impartial guidance to help you understand your options at retirement. You can access the guidance online at www.moneyhelper.org.uk or over the telephone on 0800 138 3944.
Our retirement specialists can provide you with free guidance to help you with your decisions. They can also provide advice and help you select products though this will have a charge.
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