As the pension contributions rise again in April 2019 to 8% (5% employee contributions, 3% employer contributions) there are fears that people will decide to opt out, even though their employer’s pension contributions and the tax relief given on contributions are ostensibly free money.
The government and The Pensions Regulator want the opt out rates to stay low and for employees enrolled into a workplace pension to stay in and for both employees and employers to continue to contribute, even if it’s not at the full 8%.
So, if we assume that opting down is a genuine ‘thing’. It would mean that an employee could opt to pay a reduced contribution, as an alternative to leaving the pension altogether.
If they did this though, they would no longer members of a ‘qualifying scheme’ for auto-enrolment purposes, because the minimum contribution would no longer be being made.
And taking this option would also mean that they’d have to be auto-enrolled into a qualifying scheme again every time re-enrolment comes around.
Not all pension schemes will allow this approach though and even if the scheme does allow it, there’s no obligation on employers to allow their workers to do it.
If an employer did allow this, they’d then be under no obligation to make any contribution at all because it wouldn’t be a qualifying scheme, so the minimum contribution rules wouldn’t apply.
The usual caveats would also apply regarding employers ‘encouraging’ staff to take this route – anything which could be seen as encouraging workers to leave a qualifying scheme is considered ‘coercion’ or ‘inducement’ and is strictly not allowed.
The main thrust of the idea behind opting down is that it should only be an alternative to opting out completely and also only if the pension scheme and employer both allow it. And employers who advertise the possibility to opt down or remain at a lower rate of saving once contribution rates increase again might be breaching regulations.
Written by Catherine Pinkney