Pensions auto-enrolment scheme: A warning to UK workers!
As the new tax year starts on the 6 April, according to our Money Saving Expert Martin Lewis most UK workers aged 22 and over will get a hidden pay rise and a pay cut – which your employer doesn’t need to tell you about. It’s all about the pension ‘auto-enrolment’ scheme, and Martin is here to explain it.
What is auto-enrolment?
Auto-enrolment is a scheme which says companies must automatically opt-in their employees (aged 22 or older and earning at least £10,000) to pay towards a private pension – a savings scheme to provide money for you in later life, on top of the state pension.
You can read about it in full detail, with help and pensions guidance in Martin’s full pension auto-enrolment’ guide.
It means, unless you opt out, your employer must also contribute to your pension savings – on top of your salary. And in a couple of weeks, when the new tax year starts on 6 April, the minimum amount that both you and it must contribute will increase substantially.
The effect, which you will see for the first time in your April PAYE statement, is a bit of a mind twist…
Everyone who is opted in effectively gets a pay rise… as your employer is giving you even more money you wouldn’t have got otherwise, even though it’s not immediately usable.Everyone who is opted in gets less take-home pay… to get the extra money, in most cases you will have to contribute more now too; so your disposable income, the amount you can spend each month, is reduced.If your company gives you a final salary pension, where the amount you get is based on the number of years you work and your final salary. This doesn’t apply.
How much extra will I have to contribute?From 6 April, forthe 2018/19 tax year, there are two main changes…
- The minimum your employer has to contribute increases from 1% of your salary to 2% (so £200 a year per £10,000 salary).- The minimum total auto-enrolment contribution rises to 5% from 2% (that’s the total that you and your employer together must put in).
So if your employer only puts the minimum in, that means it pays 1% now and you pay 1% too. The new minimums will be that it puts in 2% and you put in 3%. So if you’re on the minimum and you never opt out (or opted to put more in) if you do nothing you will see more money taken from your salary as part of this.
It’s worth noting your employer may also have a much more generous scheme, in which case these minimums are irrelevant and you may not see a change. There are some rare cases where employers will put in double whatever you put in – it’s worth finding out.
So how much do you get in your pension from this?
Your contribution is from your pre-tax salary so it actually costs you less than it sounds.
For example for basic 20% rate tax payers (those earning between the £11,850 personal allowance and £46,350) putting £60 a month in your pension only reduces your pay packet by £48 – as the Government gives you a 20% tax relief. For higher-rate 40% tax payers earning up to £150,000 it costs £36. The figures are slightly different for Scottish tax payers.
Plus for the first 3% you put in, your employer has to put in at least the minimum 2%. That means, even with the minimum contribution, for every £60 you put in, your employer would put in £40, so there’s a total £100 added to your pension, but that only costs you £48 (£36 at higher rate). That’s unbeatable.
I can’t afford to pay this increase, should I opt out?
Don’t opt out unless you can possibly help it, because that means you’re effectively giving up extra money from your employer.
Yet of course if you’re struggling, you may be tempted, as losing disposable income is hard to bear. Yet not doing it means giving up extra cash, and in turn that means running the risk of a cold baked bean retirement; as whether in future the state pension alone will be enough to live off is questionable. This is about saving now, so your living standards don’t plummet later.
So it’s probably a good point to reiterate that DO NOTHING, and you will automatically be saving towards your pension.
There are a few decent reasons for opting out, such as you’ve got very expensive debts to repay, you’re near retirement and have little savings (in which case a bigger pension can reduce benefits) or you’re lucky enough to be close or at the lifetime pension £1m allowance.
In a perfect world, how much should I be saving towards my pension?
Be prepared to have the pants scared off you. There’s a very rough rule of thumb that shows how much you should put in your pension for a comfortable retirement – roughly half to two-thirds of your final salary.
Take the age you started your pension and halve it.This is the percentage of your salary that needs saving each year until you retire (thankfully it includes your employer’s contribution too). So someone starting aged 20 would need 10%, aged 30 would need 15%.For most people these amounts are impossible, so don’t get too hung up on it. Instead just use it to realise that a) the sooner you start the better b) put in as much as you can afford – especially if it gets your employers contribution up to the maximum.
One trick to boost your pension contribution, if you’re lucky enough to ever get a pay rise – immediately put a quarter of the new money towards your pension. That way, because you’re not used to earning it, you won’t miss it as much (I call this the forgotten gold technique!).