The cost of living crisis and a lack of education about pension schemes may be preventing some low-earners from making contributions, according to new research by LGIM.
The survey of over 5000 people in the UK’s private sector workforce found 69% of lower earners with a workplace pension saying that they could not afford to make contributions due to the rising cost of living.
The research also found significant knowledge gaps amongst those surveyed. For example, 62% of younger workers didn’t realise they could ask their employers to be enrolled, while 59% didn’t realise employers didn’t have to make contributions on the first £6240 of their income.
Meanwhile, 38% of low-paid workers said they would have joined a scheme if they had known they had the right to ask, with the same number saying that their employer had not properly explained the eligibility rules.
Seventy-two percent of younger workers said they thought that the age threshold should be lowered, while the same number felt the same about the earning threshold.
Despite this, LGIM noted that opt-out rates from its defined contribution scheme remained stable at between six and seven percent.
LGIM is advocating lowering the age and earnings thresholds to allow more people to be enrolled in a workplace pension.
Rita Butler-Jones, Co-Head of Defined Contribution at LGIM: “There’s no doubt that auto-enrolment has been a huge success as more people than ever are saving for their retirement. However, far too many workers, particularly the lower paid, are still likely to face pension poverty in their later years if they remain excluded from the system.
“Millions of Britons are facing tough spending choices as the cost-of-living crisis continues to bite and many could, understandably feel forced to take decisions about whether they contribute to a workplace pension. That’s why it’s essential to ensure that as many people as possible understand pensions, such as the value of employer contributions and how those multiply over time, so they can make their spending choices on an informed basis.”
Stuart Murphy, Co-Head of Defined Contribution at LGIM, said that the government, regulators and financial services industry should collaborate more to ensure pensions are better understood. “Some employers may need more support around their obligations in offering scheme membership and pension benefits and how they can be promoted. We acknowledge that providers such as Legal & General have a role to play in delivering clearer, more engaging communications that explain the benefits to members.
“Better financial education is needed so that people can understand the value of building up contributions and appreciate what they might be turning down in the longer term if they decide to opt out. This education is not only relevant for school leavers or younger children, but also needs to be delivered to those already in employment.”