Workers’ auto-enrolment pension contributions will triple from today
The workplace scheme is a rare pensions success story but employees could struggle with the increased deductions from their wages as living costs rise and incomes stagnate.
Auto-enrolment has given more than nine million mostly lower-paid workers a company scheme for the first time, boosting retirement incomes and easing future pressure on the state.
Companies are legally obliged to enrol all employees aged between 22 and the state pension age, who earn more than £10,000 a year.
Employees must actively opt out if they do not want to be a member, although most have not done so.
That could change as the minimum employee contribution triples from 0.8 per cent to 2.4 per cent, which adds up to 3 per cent once tax relief is included.
A workplace pension is the best place to save for your later years, and the government recognises this which is why contribution levels are set to increase
Contributions increase again from April 6, 2019 to 4 per cent, or 5 per cent with tax relief, making a five-fold increase in total.
Someone on the average £27,000 salary will see their contribution jump from £169 a year to £517 as of today, then £876 next year, AJ Bell calculates.
Employers must also increase their minimum contribution from 1 to 2 per cent of salary from today, then to 3 per cent in 2019. This will make a total contribution of 8 per cent, massively boosting the nation’s retirement pots.
However, experts fear opt-out rates could surge as cash-strapped workers notice the increased impact on their pay packets.
Andrew Tully, pensions technical director at advisers Retirement Advantage, said there is widespread concern that take-up will fall.
He said: “Employees who are feeling the pinch with increased living costs may think their only option is to opt out.”
He urged employees to stay in the scheme as current savings levels are insufficient to give most people a decent retirement.
He added: “A workplace pension is the best place to save for your later years, and the government recognises this which is why contribution levels are set to increase.”
Mr Tully said that because employers also contribute and HM Revenue & Customs adds tax relief, workers who opt-out are effectively turning down free money.
He said: “People should see this as a pay rise, they are actually receiving more money which is being put into their pension.”
Mr Tully said the personal allowance also rises from today, reducing income tax bills.
He continued: “This means employees may not feel the full effect of increased pension contributions in their take-home pay.”
Elliott Silk, head of commercial at wealth advisers Sanlam UK, urged workers to budget for the increase.
He said: “Check the current value of your pension plan, as this will demonstrate how valuable auto-enrolment has been to you so far.”
Auto-enrolment has given more than nine million people a company scheme
He added that employees should do all they could to avoid a drop-off in membership and also target workers earning less than that £10,000, who can opt into the scheme.
Mr Silk said: “Many workers may not realise they are eligible.”
Those earning between £5,876 and £10,000 and aged between 16 and 74 can opt in and get an employer contribution.
Almost three out of 10 senior business managers are unaware that auto-enrolment minimum contributions rise from today and an even higher number do not realise they rise next year as well, according to research from provider NOW: Pensions.
Director of policy Adrian Boulding said companies that fail to comply face fines from The Pensions Regulator.
He said: “Although these changes have been planned for a number of years, some employers still risk being caught out.”
The news ignited widespread fears that many workers could opt out of their pensions
Niall Alexander, head of defined contribution solutions at P-Solve, warned that even saving 8 per cent salary is not enough to ensure a comfortable retirement.
He said: “Workers should be contributing around 15 per cent from an early age.”
Minister for Pensions and Financial Inclusion, Guy Opperman, said: “One million employers have played a crucial role by complying with their automatic enrolment duties, helping us get more than 9 million people into a workplace pension, so that they can prepare for a more financially secure retirement.
“This week, we mark the next stage in boosting the retirement incomes of workers across the nation.
“With your support, this will be an essential step in ensuring that current and future generations of the UK workforce can look ahead with confidence and know they will have the savings they need for later life.”
TOP THREE THINGS YOU NEED TO KNOW TO BE PREPARED:
1. Where your staff can go to answer questions on their financial options:
These contribution increases will help your employees save for a more secure financial future.
However, if your staff have questions about their finances that you can’t answer the best support they can get is from the Money Advice Service, the Pensions Advisory Service and the Pension Wise service.
All of these services are free and will help them get to know their finances and what their options are.
The Money Advice Service offers free and impartial money advice, more information can be found here: www.moneyadviceservice.org.uk/en
The Pension Advisory Service can also help and can be accessed here: www.moneyadviceservice.org.uk/en
Anyone who is approaching retirement and would like to discuss their options can book a free, local or over the phone appointment with Pension Wise, to book visit: www.pensionwise.gov.uk
2. Where your staff can find out more about the workplace pension:
As contribution rates increase it is important to explain the benefits of the workplace pension to your employees – after all it’s a benefit you provide so may help with recruiting and retaining staff.
Saving early on can significantly boost your staffs’ savings – money put into a pension now could benefit from years of compound interest before it is needed.
By 2019, for every £40 your employee puts in you will pay £30 and there may be an additional £10 from tax relief.
For more information on the benefits of the workplace pension for your employees visit www.workplacepensions.gov.uk/employee/
3. How to find out more or plan for any future changes:
The continued support of employers has been key to automatic enrolment’s success so far, and will continue to be vital to how we build on that success.
In October 2017, Government research indicated that micro and small employers – which represent 98% of all UK businesses – are finding automatic enrolment ‘necessary’, ‘sensible’ and ‘easier to implement than first expected’.
The Pensions Regulator will always write to you with any action you need to take but for more information visit: www.thepensionsregulator.gov.uk/en/employers