Auto-enrolment changes to give savers £5bn pay rise
The pensions landscape has undergone a major renaissance over the past few years with one of the most notable changes - the auto-enrolment law - requiring all employers to offer a workplace pension scheme and automatically enrol all eligible workers by April 2018.
However, with the current average pension pot in the UK sitting at £50,000 - too low to retire comfortably - more steps have been taken to help transform auto-enrolment contributions into adequate retirement pension pots. New rules that came into play on 6th April 2018 require you and your employers to increase their monthly contributions to a minimum of 2.4% and 2% respectively.
How does auto-enrolment work?
If you're aged between 22 and state pension age and earn at least £10,000 from one job, you will be automatically enrolled in your company’s pension scheme, unless you actively chose to opt-out.
There are minimum contribution levels that both you and your employer must pay - the Government will then add to your pot by giving you tax relief on your contributions.
So, for example if you pay basic rate tax and contribute £80 to your pension pot, tax relief by the Government will mean this will rise to £100.
Under new rules brought into place on 6th April 2018, the current minimum contributions levels are:
Government tax relief
|| 2.4% of earnings
(rising to 4% in April 2019)
(rising to 1% in April 2019)
What do these changes mean for me?
If you had previously contributed the minimum of 0.8% of your wage, this means that you will now be in a position where your monthly contributions will have to triple if you wish to stay part of the scheme.
For someone on average earnings of £27,000 a year, who previously contributed £14.10 per month (0.8%), this will now rise to £43.10 and then £73 in April 2019 (as minimum contributions are set to rise to 4%).
Unfortunately, those of you who can’t afford to pay these contributions, will have to opt-out of the scheme, however, with the state pension currently providing less than £160 per week, it’s important to remember that contributing towards your workplace pension is an essential part of life planning to ensure you have enough money for the future.
And with increased employer and Government contributions (in the form of tax relief) also rising (meaning this is effectively a pay-rise) remember that if you opt out you’ll automatically lose your employer's pension contribution, effectively taking a pay cut, and making a dent in your future financial plans.
What does this mean for my pension?
These increased contributions from yourself, your employer and the Government, will help to move your pension away from being the bare-minimum to an adequate savings pot you can be proud of.
Aviva have found that the average earner could see their pension pot rise by 30% by the end of year, and that some savers could potentially add £36,000 more to their savings.
Plus, the more money you invest in your pension, the more freedom you will have to invest in a range of different funds - providing you with greater opportunities to invest your money and grow your wealth.
Therefore, whilst your end-of-month pay slip may have you reaching for the opt-out button, it’s important to remember that this will mean sacrificing a massive chunk of your savings in the long run. Instead, use this as an opportunity to re-evaluate your cash flow each month by generating a plan and identifying any sacrifices you can make elsewhere.
Through balancing the short-term benefits against the much more valuable longer-term benefits of keeping on saving, you can make the most of this so-far highly successful experiment in nudging you to prepare more for the future.