“Opting out come April 2018 will see a loss of valuable employer contributions that, quite simply, cannot be found elsewhere. Any short-term saving cost now will pale in comparison to the valuable benefits you could have had later.”
The two tables, below, show how additional contributions would work for people aged 25 and 35 respectively.
Auto-enrolment for someone aged 35
| Total Pension Pot | Personal Contribution | Estimated income from pot at retirement |
2% (Current AE duty) | £94,092 | £21,506 | £3,293 |
5% (Duty from April 2018) | £235,229 | £64,517 | £8,233 |
8% (Duty from April 2019) | £366,445 | £107,241 | £12,826 |
Auto-enrolment for someone aged 25
| Total Pension Pot | Personal Contribution | Estimated income from pot at retirement |
2% (Current AE duty) | £164,647 | £32,065 | £5,762 |
5% (Duty from April 2018) | £411,618 | £96,194 | £14,407 |
8% (Duty from April 2019) | £643,420 | £160,138 | £22,520 |
Source: Fidelity International
Investment strategy
It is also important to understand the changing face of pensions accumulation and decumulation. Since pension freedoms came into play in April 2015, people can choose when they want to take their pensions and how.
Some people may not wish to retire at 55, 65 or even 75. They may wish to continue accumulating way past age 55 - as long as this is within the annual and lifetime allowance limits - and so the investment strategy will need to reflect this.
Other people may wish to part-retire at 55, or completely retire; some will want to go into drawdown, some will want an annuity with a set level of annual income; others may want to take their 25 per cent cash as a lump sum and then put the rest into a hybrid of drawdown and annuity.
This means, as Tom Selby, senior analyst at AJ Bell, points out, there are new challenges that providers and advisers have been forced to react to when it comes to providing a suitable and sustainable investment strategy.
He explains: "Investment strategies that previously focused on reducing risk as members approached an assumed retirement date - usually the point they would turn their DC pot into an annuity - all of a sudden look out of date and inappropriate in a world where members can spend their pension how they want from age 55."
According to Mr Selby: "All of a sudden, the 'default' path for most members wasn't annuitisation but taking 25 per cent tax-free cash at 55 and leaving the rest of their pot invested."
Therefore, traditional lifestyling - by which the investment strategy shifts away from a high allocation to riskier investments, such as equities, and into less volatile asset classes such as index-linked bonds and gilts - may no longer be appropriate or suitable for modern pension investors.
For Peter Glancy, head of policy development for Scottish Widows, the first thing to consider is how the default fund has been set up.
He explains: "Large funds which pool the assets of multiple employers through group personal pensions or master trusts can have more buying power, scaled governance and more options in terms of asset choices.
