FROM next month some employees who have a workplace pension will get an increase in the amount of money their employer puts towards their pension.
To encourage more people to save towards their retirement, the Government introduced a workplace pension policy called auto-enrolment in 2012, making it compulsory for companies to auto-enrol their employees into a workplace pension scheme. It has transformed long-term saving, resulting in more than 500,000 additional savers in Scotland building a pension pot through their employer.
From April 6, the minimum amount of money employees are due to contribute to their retirement is rising. Workers over 22 years of age and earning at least £10,000 will see total contribution rates increase to 8 per cent from 5%.
The 8% total is made up of contributions from three sources: the employee contributes 4% and in return their employer will pay in 3%. The final portion comes from the Government in the form of tax relief on the employee’s contributions, which is 1% for a basic and starter rate taxpayers. Higher rate taxpayers will receive more tax relief based on their income-tax rates.
Pension saving isn’t always simple to get your head round so instead of thinking about it in percentage terms let’s look at monthly contributions in cash terms. That way it really hits home that workplace saving may involve giving up some salary each month, but in return employees can double their money. An individual paying in £40 a month can turn that into £80 through the £10 bonus they receive from the Government from tax relief and £30 from the employer, doubling the money going into their pension.
After April, it’s likely that a take-home pay that has shrunk slightly won’t go unnoticed by employees, especially if their budget is already stretched. But an increase in personal contributions shouldn’t provoke a knee-jerk reaction - employees need to consider what they are receiving in return. It is important that the value of long-term saving isn’t overlooked. It’s still your money. It just happens to be tucked away in a different savings pot.
Increases in auto-enrolment contributions have to date had little impact on the number of people deciding not to take part in workplace saving, but there is a risk that the April rise may prompt some employees to consider stopping their contributions and opt out. The Government estimates that the proportion of people opting out is currently around 10%. It is worth pausing to weigh up what the impact of withdrawing is for those one in 10 because it is significant - the combination of your own contributions, money from your employer, Government tax relief and investment returns mount up over your entire working life.
An individual on average earnings who starts saving the minimum auto-enrolment contributions at 22 could amass a pension pot of a staggering £500,000 by the time they reach state pension age. Compare that to the highest-paying savings accounts on the high street and you wouldn’t get anyway near beating workplace saving.
Today’s pensions landscape is increasingly based around personal freedoms, giving savers greater choice from age 55 about how and when they use their pension savings. This, combined with the introduction of pensions dashboards that will allow you to see information on all your pensions, including the state pension, in one place, will help to make planning for retirement easier.
Overall the increase in contributions in April will boost total savings and the more that’s saved the more flexibility individuals will have in retirement - and the more likely it is they will be able to achieve their dreams. The incentive for paying a little extra yourself means getting extra from your employer with the Government playing a part as well. Opting out of auto-enrolment means turning down some free money. If you think of it as a pay rise you can’t go far wrong - and it’s unlikely anyone would turn that down.
Kate Smith is head of pensions at Aegon.
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