Workplace pension contributions rise: but too much or too little?
From 5 April, ‘auto-enrolment’ contributions will rise. The 8% minimum contribution level is made up of 1% from the government, 3% from the employer and 4% from the employee. However, research from consultants FTRC shows that this new 4% employee contribution could represent over 20% of monthly disposable income for millions of workers.
It calculates that based on the national average UK salary of £29,009, the new minimum employee monthly AE pension contribution from 6 April will be £76 per month (allowing for banded earnings).
Allowing for an average disposable income of £371 per month, the new pension contributions could represent 20% of an average worker’s disposable income, up from 12% previously.
Jason Green, head of workplace research at FTRC said: ”Auto-enrolment has been incredibly successful to date, creating 10 million new workplace savers. But in just 13 months their payments have gone from 0.8% of salary to 4%, assuming basic rate tax relief. This is a five-fold increase and now represents over £1 in every £5 of their disposable income. The growing revenues this will bring to pension providers are huge, but they must do more to help employees manage their personal finances so these increased pension contributions, which are essential to savers future financial security, are affordable.”
“Action is needed by pension providers so we don’t see an increase in opt-outs after so much good work to date. Employees who opt out, will be effectively throwing away free money from employer’s contributions and tax relief. The need for workers to understand the value of saving for the long-term and the benefits of being auto-enrolled into a pension, has never been more important. We believe it is crucial that consumers are given as much help as possible from employers, providers and advisers to help them better manage their finances.”
At the same time, research by NOW: Pensions shows that as it stands no auto-enrolled saver paying minimum contributions will be saving the full 8% because of the way contributions are calculated. While this may free up disposable income, the group warned that savers could be £40,000 worse off in retirement.
There are lower and upper ‘qualifying earnings’ thresholds for auto-enrolment contributions. From 6 April, the lower qualifying earnings threshold will rise by £104, meaning employees won’t receive auto enrolment minimum contributions on the first £6,136 of their earnings each year. Earnings over £50,000 won’t be included either. For somebody earning £25,000 a year, this means only £18,864 of their salary is counted when calculating their auto enrolment contribution.
The could mount up over time. The average 25 year old male worker will see £125 per month (£1,497 per year) added to their pension pot, instead of £166 per month (£1,988 per year). Over 40 years of saving, this would wipe £40,200 from the average pension.
Adrian Boulding, policy director of NOW: Pensions, said: “Auto enrolment is helping 10 million people save for their future, which is a huge step forward. But the way contributions are being calculated are leaving many short changed. The rules are especially unfair for part-time workers who have the same £6,136 taken off their earnings as their full-time colleagues. The government has an opportunity to give auto enrolled savings a shot in the arm by changing the way contributions are calculated. This is a measure we hope to see included in the Pensions Bill expected in the Spring.”
Your Money view: Opting out of a workplace pension scheme is usually a bad idea. If you’re putting in £100, there’s another £100 going in from the government and your employer. That’s a lot of free money and an easy way to take care of your pension savings. For some, the new contribution levels may stretch their finances, but see if you can find another way round it. It may be possible to reach an agreement with your employer without opting out completely. Your future self will thank you.