Since its introduction, in 2012, more than 10 million people have been automatically enrolled into a workplace pension.
When it was launched the total minimum contribution level was set at 2% and it remained at this level until April 2018 when it was increased to 5%.
From 6 April this will rise further to 8%, incorporating a 4% employee contribution, 3% employer contribution and Government tax relief topping this up by 1%.
However, although employees will benefit from an increase in ‘free money’ in the form of higher employers’ contribution and Government bonus, there are still some employees who will choose to opt-out out of their workplace pension, according to official figures.
Government statistics show around 9% of employees opted-out of their workplace pension for the financial year 2016/2017 and, whilst the rises in minimum contributions levels have not led to significant increases in opt out rates, those who do choose to withdraw stand to lose out considerably over the course of their working life, according to Aegon.
A 22-year-old joining a workplace pension scheme in April will currently receive their state pension at the age of 68 in 2065.
Aegon’s analysis found that this employee, joining the scheme on UK average earnings, would lose out on a fund of £542k by 2065 if they opted out of the scheme.
As well as personal contributions, the fund would include their employers’ contributions, Government bonus and investment returns.
Kate Smith, head of pensions at Aegon, said: “Whilst retirement may seem distant for many young workers and is often pushed to the back of minds, choosing to opt out of a workplace pension can be a costly mistake.
“Immediate priorities such as saving for a house deposit will inevitably be the focus for those starting on the career ladder.
“However, young employees should not choose to forego their pension contributions as they could stand to lose out on a significant pension pot if they fail to rejoin.
“From April 6, an individual contributing £40 a month from take-home pay into their pension will receive a £10 bonus from the Government, assuming 20% tax relief, and £30 from their employer.
This brings the total amount going into their pension to £80 and the decision to opt out effectively means throwing away these benefits.
“Workplace pensions are beginning to turn around the UK’s savings habits.
“For many employees, it is their main means of savings for retirement and we should applaud the role that auto-enrolment has played in this.
“However, for people to achieve the level of retirement income they aspire to they need to save more.”
She added: “The rise in minimum contribution levels for auto-enrolment is another step in the right direction for increasing long-term savings, but individuals need to understand that contributing just the minimum amount is likely to leave them with a shortfall in retirement.”