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Shunning workplace pension contributions could leave a £272k hole

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Contributions on workplace pensions are due to rise next month, from their current level of 2% (1% each from employer and employee) to 5%, split 3% from the employee and 2% from the employer.

Fidelity is urging investors not to opt out after its research showed that those who shun rising pension contributions could stand to lose over a quarter of million pounds over their working life and the equivalent of the state pension in annual retirement income.

Those who stay at the current level of 2%, split equally between employee and employer could potentially generate a pot of £94,092 by the time they reach retirement.

By paying the additional contribution from April, they could see this pot hit £235,229. This would cost only £35 a week for someone earning £35,000, as the benefit of employer money, tax relief and compounding work their magic.

The total contribution rate rises to 8% in April 2019. If employees keep paying in at that point, the pot could reach £366,445 – nearly three and a half times that of a person who chose to keep paying just 2%.

This will provide them with a significantly larger income in retirement. Consumers who do not increase contributions at all would get nearly £10,000 a year less than those who had persisted in saving in line with the increases

Total Pension Pot Personal Contribution Estimated income from pot at retirement2
2% (Current AE duty) £ 94,092 £21,506 £3,293
5% (Duty from April 2018) £ 235,229 £64,517 £8,233
8% (Duty from April 2019) £ 366,445 £ 107,241 £12,826

Carolyn Jones, head of pensions product at Fidelity International, said: “Recent commentary has focused on what consumers stand to lose next month and we need to turn this way of thinking on its head. Because consumers stand to lose a lot more – namely the equivalent of the Basic State Pension in annual income – if they fail to increase their contributions come April 2018.

“Auto-enrolment was a water shed moment as it changed the dial from ‘do nothing, get nothing’ to ‘do nothing, get something’. Saving for retirement is no longer an option – it is an essential period of life to plan for as the state begins to tussle with the challenges of an ageing society. While there is lots of noise about the cost to consumers, auto-enrolment – even with the uplift in contributions – still offers people a return of nearly 350% on their personal contributions thanks to a boost from their employer and tax relief.”

See the Your Money auto-enrolment guide here.

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