Can I opt out of my workplace pension?

Your employer is required to enrol you on a workplace pension so long as you meet certain eligibility criteria. But what it can’t do is force you to pay into it and you have the right to opt out if you wish.

Opting out of your workplace pension can be tempting, especially when you are short on cash or have more pressing financial goals. However, it could have a long-term impact on your finances.

Here, we explain what opting out of your pension involves and the things you should consider first.

What happens if you opt out of your pension?

When you opt out of your workplace pension, you’ll notice your take home pay goes up.

But before you get too excited, it won’t go up by the amount you were contributing. This is because you get tax relief on pension contributions, and that money will now be taxed as part of your income.

You’ll remain opted out for three years, and your employer will automatically re-enrol you after this period, although you can opt-out again.

Legally, employers must check with you every three years to see if you’ve changed your mind about joining the workplace pension.

Opting out of pension contributions doesn’t mean you’ll lose the savings you’ve made so far. 

Your contributions will remain invested in your pension until you start taking money out - which is any time from age 55, rising to 57 from 2028. 

You can, however, ask for a refund if you leave within 30 days of enrolling.

If you want to rejoin the scheme at a later date, you can. However, your employer is not obliged to rejoin you more than once in a 12 month period. 

Benefits of opting out of a workplace pension

There are some occasions where it makes financial sense to opt out of your workplace pension. You might need the money to clear any high-interest debts, for example, so that a year down the line, you’re in a better position to save for retirement in earnest.

If you stop contributing to your pension, though, it’s important to set up standing orders or automatic transfers to make sure the money you need to save isn’t frittered away.  

The downsides of opting out of a pension

While opting out of your workplace pension might give your finances a short-term boost, it could seriously damage your long-term plans.

Without decent pension provision, you may need to work longer or move home when you retire. 

You might also find yourself desperately trying to catch up later in your career, struggling to make larger pension contributions to compensate for the years you missed.

If you’re in your 20s, you might not see the point in saving for retirement yet.

However, this is the smartest time to start saving for retirement. That’s because the earlier you start, the more time you’ll give your savings to grow and the less you’ll need to save overall.

Saving £250 per month from the age of 25 could get you an income of around £20,000 per year if you retired at 65, which could last you until age 75, so you should aim to save more. 

This is based on the assumption of 5% investment growth a year, 2.5% inflation and a low annual management fee.

Wait until you’re 35, and you’d need to save £360 a month for the same outcome. At 45, that skyrockets to £570 every month.

This is a simplistic example that doesn’t include employer contributions or tax relief but highlights that the sooner you can start saving, the better.

You can find out more about how much you should be saving for retirement using our pension calculator.

How to opt out of a pension

It’s pretty simple to opt out of your pension. Generally, you’ll just need to contact your pension provider and get a form that opts you out of auto-enrolment.

Your employer legally has to give you the provider’s details if you ask for them, so speak to your HR department if you’re not sure where to find them.

If you opt-out less than a month after you were auto-enrolled, you’ll get any contributions back. Otherwise, they will remain invested for you to access once you’re old enough. 

Should you opt out of a pension?

Generally, it’s not ideal to opt out of your pension.

Stopping your pension contributions only makes sense if it’s genuinely going to help you strengthen your financial future, which in most cases wouldn’t.  

Workplace pensions are a unique, tax-free savings vehicle that also gets topped up by your employer. Some employers will also make generous contributions on your behalf, over and above what they are required to pay in by law. 

By opting out, you are essentially turning down free money.

If you’re in your 20s or 30s and decide to pause your contributions for a year to clear a debt or help with an infrequent expense like buying a house, the impact will not be as great.

But if you’re closer to retirement or end up halting contributions indefinitely, it could have a more serious impact on your future financial security.

What if I want to save in my own pension?

Affordability may not be the only reason you want to opt out of your workplace pension.

You may want to save into your own personal pension, such as a self-invested personal pension (SIPP) instead, which offers a wider choice of investments and better growth potential.

You might also find it easier to invest in a way that aligns with your values with a pension that you have arranged yourself.

However, the catch is that by opting out of your workplace pension in favour of another, you will miss out on contributions from your employer. These can be generous, especially for higher earners.

In these cases, it may be worth remaining in your workplace pension, which your employer will pay into, and then paying an additional amount into the personal pension of your choice.

Need help with your pension?

It can be hard to decide when to start a pension, how to maximise contributions or whether opting out is worth considering.

Unbiased can quickly match you with a qualified financial adviser who can help you make the right decisions based on your unique circumstances.

If you found this article useful, you might also find our article on what to do if your employer hasn't paid your pension contributions informative, too.