Martin Lewis' pension warning - you could be 'throwing away free cash'

Workers have been issued an important pension warning as they could be “throwing away free cash”. You could be missing out on vital funds without even realising it.

In the UK many people have two types of pensions: the State Pension and workplace pension. The State Pension is provided by the Government and depends on how many years you’ve paid National Insurance (NI) contributions.

Each new employer usually has to create one for you when you join if you’re eligible.

However, a finance expert advised against opting out of these. In an update on his Money Saving Expert (MSE) website, Martin Lewis explained more.

Firstly he stressed the importance of pensions. He said: “I had far more questions for last week's ITV Pension Special than usual, thousands upon thousands. Most from older people, but you shouldn't leave thinking about your pension till, like me, your hair's greying at the edges.

“As most people put £100s or £1,000s in pensions each year from age 22, it's something all should understand. For those saying: 'Ah, just live for the now'... Remember, we typically only work 45 to 50-ish years of our 85-year lifespan and that work income needs to cover all the fallow years, meaning saving for retirement is crucial (when we're little, our parents pay for us, but most then need do the same for our kids).”

As part of his general pension advice, Martin urged people not to opt out of workplace pensions. “Employee?” he said. “Don't throw away a hidden pay rise. If you save, your firm MUST contribute too.

“I was asked in the show whether someone should opt out of their workplace pension and use a private pension instead. All the specialists and I immediately said NO! While there may be a marginal improvement in the investment choice, it's likely throwing money away as...

“By law, employees aged 22 up to State Pension age, earning over £10,000/yr, are automatically enrolled into a pension (ie 'opted in' to contributing without being asked) and, crucially, if you're opted in, your employer MUST contribute too.”

Martin explained some of the financial details. He said: “For a Money Purchase pension, the minimum contribution is 8% on earnings between £6,240 and £50,270, though many employers will do it for more. And of that, the employer must contribute a minimum 3% points of that (meaning you pay 4% and there's 1% tax relief), though again, some pay more.

“This is a huge boon. It means it actually has to give you more money than just your salary (though, of course, your current disposable income is less due to your contribution). Per £100 in your pension, the employer adds £60, so that's £160 total going in, and with the tax relief too, this only costs you £80 as a basic rate taxpayer - meaning you get at least double invested compared to the cost to you.”

He therefore urged people to “beware” of opting out. He said: “Opting out is usually a bad idea, as you're throwing away free cash.”

Martin added: “Even if you think 'I just want to lower my contributions' beware: lower it below the minimum 5%, then your firm doesn't need to contribute (many do, but they don't have to), so check before any action.”

For more information, visit the MSE site here.