Pensions are washed – How Gen Z’s abandonment of pensions impacts employer obligations

A common topic of debate among those financially savvy is how young is too young to begin saving for retirement.

Increasingly, Gen Z are testing this concept by forgoing pension contributions in favour of taking home more money per month than they otherwise would.

For employers, the pension pot exodus has a notable impact on their payroll obligations that must be managed to avoid non-compliance.

Why are Gen Z workers not saving into a pension?

Gen Z workers have quite a different attitude and approach to work than previous generations and this is manifesting across all aspects of their engagement with traditional practices.

Just as Gen Z are less likely to stick with a job if they feel a better opportunity exists elsewhere, they are also not seeing the benefit in struggling to get by in the present for the promise of having a comfortable retirement.

According to the Department for Work and Pensions, in Q3 2020/21, 6.6 per cent of 22 to 29-year-olds had opted out of a pension and this increased to 11.5 per cent by the same point in 2025/26.

Millennials are also following suit, as 12.7 per cent of those aged 30 to 39 had opted out of pension contributions in Q3 2025/26.

The cost-of-living crisis is inspiring more people to get the money they need in the moment to make it through each day, while a prevailing sense of nihilism means the concept of retirement being possible is something that fewer young people ascribe to.

Should the trend continue and fewer Gen Z workers see the value of pensions, employers will have to engage more with their payroll obligations.

How are employers affected when employees opt out of pensions?

If an employee opts out of a pension, the employer payments must also cease.

However, the exact way in which the opting out occurs affects the way in which the pension is handled.

Should an employee opt out within one month of the pension being established, as soon as they cross the threshold for auto-enrolment, they are effectively never enrolled in the pension.

Any contributions that may have already been taken should be refunded to the employee, as it is clear that they have no desire to be part of the process.

A record of the opt-out notice must be kept for at least four years to prove that you fulfilled your obligation of auto-enrolment and that it was the choice of the employee to go without.

If an employee has already started building a pension pot and then decides to opt out, no refunds are to be offered.

The employee can reach out to the pension provider themselves to determine when the money paid in can be accessed, but the employer’s obligation is minimal.

What must happen is that your contributions should cease and you should be mindful that the employee is not automatically paying into the pot again until you have their explicit permission.

Ongoing observation of payroll records is vital in a workplace where different people have different approaches to pensions.

You may be concerned that your employees are taking a myopic approach to finances, but opting out of a pension plan cannot be used to influence hiring or promotion decisions.

Additionally, you cannot ask, force or influence any employee to opt in or out of a pension – you must only present the standard practice in a neutral manner and allow them to decide.

Payroll can become complex as different employees engage with their salary in different ways, so having an expert accountant oversee the situation can be beneficial.

Our team will help keep you on track with all of your payroll obligations, ensuring that you are fully compliant.

Managing payroll effectively keeps you on the good side of your employees and prevents you from facing HMRC penalties, so it is not worth leaving things to chance.

Get in touch with our expert team to confidently manage your payroll and pension obligations.