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Why you shouldn't pay into a pension

· 7 min read
Ben Butterworth

I've been opting out of my pension within a few months of starting a job at any company. Every time, it's taken considerable thought and confusion. It seems like every few months a ridiculous event occurs, related to pensions. I wanted to share why I stopped contributing to pensions so others can make a more informed decision. I wish I had seen such an article in the past.

Caveat 🥦​

  • The following is based on my experience of having 3 pensions in the UK (different companies I worked for use different providers).
  • I am not selling anything.
  • This content is free.
  • This is not financial advice, which is a regulated activity. Financial advice is usually paid for, and the seller of the advice often makes money from you even when you don't - their incentives are not aligned with yours.

Background: What is a pension? 🤯​

A pension is a monthly bill you automatically pay as a percentage of your salary. For example, if you earn £1000 a month, you can pay £50 (5%) every month until you retire. This money cannot be accessed until you retire. It is opt-in, which means everyone who works gets this, by default. In some cases, your employer will pay more money every month, e.g. £25.

ChatGPT: A pension is a long-term savings plan, where you contribute a percentage of your salary every month until you retire. These contributions are usually made automatically, and you cannot access the money until you reach retirement age.

Why use a pension 🧟‍♂️​

There's a lot of information about this online. For example, a course by MoneySavingExpert, MSE’s Academy of Money.

Why avoid pensions 🚨​

  • Potential death: You might not make it to the end. You might die before you retire. And if you do make it to retirement, the pension fund has an incentive to make it harder for you to get your money - they might not even have all your money. They might lobby to change the date, reduce the payments, etc.
  • Law changes: The government and pension providers have a lot of power over your money. They can raise the age you can take your money or limit how you can use that money. See Proposed new timetable for State Pension age increases. Also, the government organisation to handle pension complaints is not well trusted on trustpilot - currently rated 1.7 stars. Your retirement plans will be affected by the governments changes. As governments get squeezed - they need to squeeze their people, with tax and pensions law changes.
  • Higher taxes and extra cost: Although you don't get taxed now, you will get taxed when you retire. By then, taxation will probably be higher, not lower, as governments go into more debt. Overall, you might get taxed more than just getting the money now. See UK tax burden to hit highest levels since the 60s. Also, the pension providers charge you a fee (percentage of your pot).
  • Get the money now:
    • Contribute to a house deposit
    • Invest in yourself: education, training, holidays?
    • Feed people: bills have been going up, and perhaps you actually want to spend that money now to feed your children today.
    • Invest your money anywhere else
  • Rigidity: currency might be devalued in the future. Sure, you can invest in index or mutual funds on there instead, but have you seen the limitations of the pension websites.
  • Irrelevance: for some people who are financially well-off, they would have investments which make them more money, consistently. This might be a business, or a mortgage on a flat they own but rent out. Every month, they get more money than they spend (including mortgage, bills, food, holidays). The cost of managing multiple pensions would be unnecessary work in their lives. They'd have to monitor a separate app and potentially types of investments.
  • Incentives and competition: pension funds/managers are not very good at investing: the UI is not very good, unlike other dedicated-investment apps. They have no incentive to build good UX, since you have no choice in taking your money out. They are not very good companies, just look on the complaints filed on the pensions ombudsman (for example, this complaint on the NHS Pension Scheme).
  • Fragmentation of pension: over the years, you might have opened more than 1 pension. It hurts my brain to remember the pension providers that I might have used.
    • Switching cost: Choosing and moving-between them is a hassle. Different jobs you have will get different pension providers. There are many pension providers, and they do not want to talk nicely with each other. See trustpilot reviews of nestpensions.
      • The company has no incentive to be a good investor. They have your money already, and have the ultimate customer on long term subscription.
      • Can you even move your pension to another country? What happens if you don't like Brexit or are struggling in the UK economy?
    • Forget: You might forget about some pensions. The company has no incentive to remind you.
  • Less control: You have very little control over the money:
    • simply, you can't use the money until the term ends (48 years for me). Your buying power is less. When you find a flat to buy and it is 5% higher than you can buy, remember your pension took that money away from you.
    • you can't control how it is invested. If you bought that 5% house, you could rent out some room to lodgers, and save money.
  • Philosophical:
    • It is opt-out: Facebook was annoyed that the iOS default switched away from opt-out to "ask the user" (not even as harsh as opt-in), they even put adverts on the news to target Apple. They set it to opt-out so most people are automatically in it - if it's so good, why not just let people know and let them opt-in.
    • The wrong solution: What is the argument for a pension? That you don't save enough for retirement, you overspend before retirement and/or you overspend when you're retired. Surely a good solution would be education.
    • Agility: Those who move fast can exploit an opportunity for success. Conversely, if you move slowly, you have a lot to lose. Pensions is immobile money, which means you get the worst deals.

Summary 🏁​

So that's it - an uncommon view on pensions. Reply with your view points in the comment section - tell me I'm nuts - you might be helping me 🤓. I wonder how the recent and future AI technology will affect the economy and governments, which in turn affect taxes and pensions.

Warning: Do not opt-out of the pension to spend the extra money on unnecessary things. Default to saving money, not spending it. When I got my first raise, I thought to myself, "Oh wow, I've got £N extra cash, every month. What can I spend it on?". Then I remembered, this will help build my safety buffer.

Reminder: do you know where all your pensions are, and how they are growing over time? Keep track of them.