Prepare for Jump in Pension Contributions

Friday rings in the new tax year, and with it, new minimum contribution requirements for auto-enrolment workplace pension schemes

Emma Wall 4 April, 2018 | 10:11AM
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On Friday, your minimum contribution rate for workplace pensions jumps from just 1% of salary to 3%. Currently the total minimum contribution is 2%, made up of pre-tax earnings from the individual, bumped up by the employer.

But this is rising to 5% from April 6 – the new tax year – and the employer is only required to contribute 2% of this, leaving the individual to make up the bulk. In 12 months time this will jump again, to 8% total contribution rate, with a minimum employer input of 3%.

Experts assure us the rise is more than necessary – in order to eradicate pension poverty some predict the total contribution rate needs to be considerably more, advocating up to 15% of salary is saved annually to fund a comfortable retirement.

“This month’s mandatory increase to a minimum contribution of 5% is certainly a step in the right direction,” says Claire Felgate, Head of UK DC at BlackRock.

“However, there is a risk these could be misinterpreted by savers as the ‘magic number’. Even when auto-enrolment contribution rates reach 8% in 2019, this is unlikely to be enough and could create a false sense of security among savers that they are saving enough to achieve a financially comfortable life in retirement.

“In line with the DWP, we recommend that the minimum contribution rate is scaled upwards to a total of 15%. Of course, an immediate shift from 8% to 15% contributions can’t happen overnight. We believe auto-escalation techniques, such as increasing contribution rates with future pay increases, would allow people to achieve the 15% in a more gradual way while still having a meaningful impact on their future retirement income.”

A Success, for Now

Auto-enrolment was introduced in 2012 to ensure all employers offered a workplace pension. Starting with the largest firms, companies have rolled out schemes giving all employees earning more than £10,000 a workplace pension. If you £5,876 annually you can request to join the scheme. More than one million companies have now rolled out a pension scheme since auto-enrolment was introduced.

On launch, it was estimated that 11 million individuals would be auto-enrolled as a result of the initiative, resulting in £17 billion of extra saving a year in workplace pensions by 2020.

Auto-enrolment thus far has been deemed a success, with minimal opt-out rates. The Department for Work & Pensions found in a December 2017 review that the biggest increases in participation have been amongst younger people, those with lower earnings and those working for smaller employers. But this is anticipated to change once the minimum contribution rises.

“Auto-enrolment has so far boosted numbers saving, but two huge obstacles are looming in the form of contribution hikes in 2018 and 2019,” warned Nathan Long of Hargreaves Lansdown.

“The £18 that someone with full-time average earnings is currently required to spend on pensions each month will jump by £74 to £92 come 2019. All of a sudden this is no longer spare change.”

Elliott Silk, head of commercial at Sanlam UK agreed, saying auto-enrolment legislation was doing its job and getting more of the nation saving towards retirement, but a big hurdle was “just around the corner”.

“It is vital that with the first increase in contributions coming up in April that employers do all they can to avoid a drop-off in membership,” he said.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Emma Wall  is former Senior International Editor for Morningstar