This content was reviewed and approved by Andy Gray.
People opt out of a pension scheme for many reasons. From paying off debts to covering new expenses, opting out can seem like a smart choice at the time, especially if you’re younger and have years left until retirement.
However, despite the immediate benefits, opting out of a pension can have long-term implications for your finances that may affect you in later life. You should always speak to your employer, if you are thinking of opting out of a workplace pension, and seek financial advice before deciding to take this option.
The information on this page should not be considered as financial advice. If you are unsure what’s right for you, please make sure you speak to a financial adviser.
Can I opt out of my pension?
Yes, you can opt out of any private pension or workplace pension whenever you like. You can access the money you’ve already invested when you reach 55. This will increase to 57 from April 2028.
If you’re thinking of accessing your pension early, you may want to consider any other savings you may have instead of opting out.
Ultimately, opting out of a pension is a personal choice that depends on many factors such as:
1. Your retirement plans
The age at which you plan to retire and the lifestyle you’re seeking when you stop working. Opting out early could affect your pension income during retirement.
2. Your pension pot
How much money you have already saved in your pension pot, and how much more you’ll need to provide the lifestyle you want when you retire.
3. Your personal circumstances
Your current finances and how much you can afford to pay into your pension pot at the time.
If you’re considering reducing your pension contributions or opting out, it’s important to assess the impact this may have on your future income. For instance, opting out early could mean you may have to keep working for longer, pay more into your pension pot as you get older, or lower your lifestyle expectations.
Can I opt out of a workplace pension?
Yes, you can opt out of any pension scheme including a workplace pension or a private pension. If you’re looking to leave a workplace pension it depends whether you’ve been ‘automatically enrolled’ or not.
If you’re automatically enrolled in a workplace pension scheme, you may decide to opt out at any point. However, doing this could mean you’ll miss out on valuable benefits when you retire. Also, if you leave it late, you may be unable to receive a refund on your payments, and the money will stay in your pension until you retire. You should speak to your employer.
It’s also best to contact the pension provider to discuss the implications of opting out of a workplace pension. The UK Government also offers clear guidance around workplace pensions and opting out.
If you have not been automatically enrolled in a workplace pension, you should check with your employer.
Can I cancel my pension and get the money?
Yes, you can normally cancel your pension and get your money back within 30 days of receiving a cancellation notice from the scheme provider.
If you are a member of a workplace pension scheme and leave your employer within the first two years (for example if it’s a defined benefit scheme), you may not be able to remain as a deferred member of the scheme and can only choose to have your own (not employer) contributions refunded, or to have a cash equivalent transfer value paid to another pension scheme of your choice.
If you decide to leave your pension scheme after this period, you won’t lose the money you’ve paid in or any contributions from your employer. In most cases, you’ll be left with two options:
- Move your money to a new pension scheme, like the one offered by a new employer.
- Leave your money where it is and receive a payout when you retire.
Should I opt out of my pension?
Only you can decide whether opting out of your pension is the right choice. There are many reasons why people opt out of a pension, and one of the key reasons is the extra cash it provides for current living expenses and financial commitments.
Ultimately, if you decide to opt out of your pension or reduce your contributions, it can have a negative impact on the income you’ll have in retirement. That could mean working longer in life, paying more into your pension when you’re older, or changing your retirement plans.
Why do people opt out of their pension?
People opt out of pension schemes for a variety of reasons. For example, they may need the extra cash from stopping their contributions to pay for new financial commitments or family expenses.
Opting out isn’t a one-time decision, and you can usually opt back in if your circumstances change. However, re-joining a pension scheme, particularly if it’s a workplace scheme, can be a lengthy process and it could be months or longer before you can start paying back in, so you’ll miss out on any benefits you may have had during the intervening period.
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What benefits will I lose if I opt out of a pension?
If you opt out of a pension scheme or stop paying in, you may see only a minimal improvement in your take-home earnings after tax.
This is because paying into a workplace pension can reduce your National Insurance contributions or student loan payments. When you stop paying into your pension, these reductions will cease and your National Insurance contributions may even go up, partly undoing any savings you may have made.
Some of the other valuable benefits you may miss out on by opting out of a pension include:
- Tax relief: Paying into your pension is usually more tax efficient than receiving the same money in your salary as take-home pay.
- Employer contributions: Your employer may match what you’re paying into your pension or at least pay a percentage, thus boosting your pot. If you decide to opt out, you’ll lose this perk.
- Enhanced growth: Money taken out of your pension can’t grow alongside any other savings you may have. Early investment in your pension gives it the best possible chance of growth over time.
- Illness benefits: Opting out could deny you benefits for illness or injuries that prevent you from working before you reach your agreed retirement date.
- Death-in-service: You could miss out on benefits your scheme may pay to your dependents if you pass away, such as death-in-service benefit.
What other disadvantages are there to opting out of a pension?
When you opt out of your pension, or stop contributing, it can take many months or longer to opt back into the scheme if it is a workplace pension scheme.
Many employers only review requests to opt into a pension now and then or even annually, meaning you could miss out on a number of payments, leaving you with a larger shortfall than expected. Not only that but opting out for a long period may result in you working longer to fill the gap in your pension contributions.
You can check which benefits you could lose by opting out by reviewing the details of your workplace pension that you should have received from your employer.
Have you asked: Should I opt out of my pension?
Retirement is a major milestone, and it helps to be prepared for the next chapter of your life. If you’re considering opting out of your pension, LV= can offer friendly and professional retirement advice.
We’ll help you to make an informed decision as well as understanding what size pension you’ll need for the lifestyle you want in retirement. Contact us today.
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