Over the next two years, anyone who has been automatically enrolled into a work pension will see a little more of their monthly pay squirrelled away.
The level of saving the programme requires is rising, by a small amount next April and then a larger amount a year later.
The increases represent a challenge to the auto-enrolment system that has otherwise proved a wild success up to now. Far fewer people than forecast have decided they want to opt out of pension saving once they’ve been opted in - a good thing - but this has been while the contributions from individuals has been a lowly 1% of their qualifying earnings.
What happens when they are asked to save more?
As we’ll show here, there are very good reasons to stay in the scheme. Many people will be saving more than these required levels anyway (particularly if you are here, reading this article), so may not be directly affected by the increases, but it may still be useful for other people you know, particularly young people who would otherwise be making no provision for their retirement.
Since the start of the scheme in 2012, those automatically enrolled have been required to contribute at 1% of their earnings between £5,876 and £45,000. This has been matched by a 1% contribution from their employer.
The first change to this arrives on April 6 next year. At that point, these contribution levels change so that individuals pay in 3% of the qualifying earnings, while their employer pays in 2%.
Then, a year later on 6 April 2019, the rates rise again to 5% for individuals and 3% for employers.
What will be the effect on pay packets of next year’s increase?
Clearly, higher contributions mean more is taken from an individual’s salary each month, and the exact amount depends on their earnings.
As an illustration, figures crunched by Willis Towers Watson, the pension scheme consultant, show that, for a person earning £45,000 a year, the increase in their contributions next April from 1% to 3% would see an additional £520 a year taken from their pay. That’s £43.33 a month.
What will they get in return?
That level of reduction in take-home pay may well be felt in a way that the current 1% employee contribution is not. That’s why some worry rates of opting out of pensions could rise.
Yet a brief consideration of the reward for that extra saving shows why opting out would be imprudent. In exchange for the extra £520 they give up each year, our £45,000 earner would see £1,165 paid into a pension. That includes the contribution they have made but also their employer’s chunk too, as well as another boost from the tax relief that applies to pension contributions.
That money can be invested and given the chance to grow to an even bigger figure by the time they come to access their pension money (at which point it is taxed as income, barring 25% of it, which can usually be taken tax-free.
There’s no doubt that higher contribution rates for auto-enrolment will be felt by many workers. But if you are minded to opt out as a result, or know someone else who is, bear in minded these numbers.
Our Pensions Service Centre team will be happy to talk through any aspect of your Fidelity Workplace Pension with you, including how you may be able to increase your contributions.
The Pensions Advisory Service offers free, independent and impartial information and guidance to people with workplace and personal pensions on all pension matters at www.pensionsadvisoryservice.org.uk/ or over the telephone on 0800 138 3944.
The value of investments and the income from them can go down as well as up, so you may not get back what you invest. This information does not constitute investment advice and should not be used as the basis for any investment decision nor should it be treated as a recommendation for any investment or action. You should regularly review your investment objectives and choices and if you are unsure whether an investment is suitable for you, you should contact an authorised financial adviser.