Workers are turning down generous pensions

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Employees of some of the biggest companies in the UK are turning down thousands of pounds worth of pension payments every year. With a growing gulf between the sums people need to retire on and the paltry figures they are set to receive from their pension, it's hard to imagine how people could be willingly walking away from money their employer is prepared to give them.

The phenomenon was highlighted by consultants at Towers Watson. They pointed out that one in four FTSE 350 companies offer pension contributions worth up to 10% or 11% of people's salaries, but that a significant proportion of the workforce was failing to take advantage of the higher levels of contributions.

Why don't we?

The problem is that in order to receive enhanced pension contributions, employees need to put in more money of their own too, and this comes up against a few barriers.

The first is that we don't feel that we can afford to put away any more of our salary. At a time when wages rises are few and far between, and the cost of living has been going through the roof for years, it's perfectly understandable that people want to keep as much of their reward in the form of salary as possible.
The second is that human beings are notoriously poor at deferring gratification. We have worked for this money, so we want to enjoy the benefits of it right now - and it's hard to muster the enthusiasm for enjoying it later instead.

And finally, we struggle to imagine the difference the decision is making to our future prospects, because it isn't adversely affecting our day-to-day lives, so we have no reason to want to change the status quo and save more.

Why this matters

The problem is that the difference it makes is profound. Which? calculated that in order to have £30,000 a year in retirement, a 35-year-old would need to save £654 a month. If, however, they decided to save £215 instead, they would retire on £15,000.

If we assume the employer will match the contribution, these figures are halved, so the individual is contributing £107.50 and needs to increase that to £327. By paying in an additional £220 a month, they will increase their income by £1,250 a month in retirement. The benefits become strikingly clear.

The difficulty is that we can feel the difference that £220 makes to us now, and we struggle to imagine the difference £1,250 will make in thirty years time.

And that failure of imagination is pushing millions of people towards a retirement of real poverty.

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