Take-home pay is set to fall from April 6, but this is actually good news over the long term, we explain why.
The 10 million pension savers who are currently auto-enrolled will see their contributions rise from 5% to 8% at the start of the new tax year on 6 April. Employees will pay 5%, up from 3%, while employers will contribute the remaining 3%, an increase from 2%.
According to AJ Bell, this means someone earning £30,000 will see their personal contribution rise from about £575 to more than £955 for the 2019/20 tax year.
But, despite the rise, fears of a spike in opt-outs – an issue many feared would transpire last year when contributions rose from 2% to 5% – looks unlikely when the increases come into force.
Nest, the workplace pension scheme by the government, expects opt-out rates to remain at low levels of less than 10% across the industry. In a report published earlier this month Nest said it had seen “no evidence of an increase in cessation or opt-outs following the automatic increase in contributions”. It added: “Looking ahead to the next rise in April 2019, there are many reasons to believe there will be a similarly low impact on cessations and opt-outs.”
One of the big factors behind the success of auto-enrolment is people’s inertia. Many savers may not even know that they are contributing some of their income towards a pension, or may consider it negligible because the level of contributions is so low.
Moreover, those that do opt our or leave their workplace pension will be giving up ‘free money’ from both their employer contribution and the government in the form of tax relief.
Stuart Price, partner and actuary at Quantum Advisory, agrees. He says: “I don’t think people will be put off saving for their retirement because of this 2% contribution increase. With a rise in the tax-free personal allowance and the national living wage, the increase on net take-home pay will not be that visible to many individuals.”
He adds that younger savers seem switched on to the fact they cannot enjoy a comfortable retirement on the state pension alone. Indeed, there are no guarantees the state pension will still exist in its present form in 30 or 40 years’ time.
The government is acutely aware of the problem on its hands to sustain the state pension. Last year the Government’s Actuary Department (GAD) warned that National Insurance (NI) contributions need to rise to fund it. The GAD calculated that a 5% tax hike is required to sustain the state pension, which is being stretched by the UK’s ageing population. According to GAD, the fund will be exhausted by 2033 under the current NI rates.
But the reality, according to Kate Smith, head of pensions at Aegon, is that the auto-enrolment contributions are not going to be enough for individuals to secure a comfortable retirement.
She says: “While the 2018 increase in auto-enrolment contributions had little impact on the opt-out rate, partly because many employees were already paying above the minimum, there is a risk that with contributions rising in April, some employees may consider stopping contributions. This is despite the positive impact that inertia has had so far.
“For most people, even with contribution levels rising, auto-enrolment contributions aren’t going to be enough and people should calculate how much they need for retirement and ensure they are saving what they need for later life.”
Price also stresses that although this is the last scheduled contribution rise that has been set out by the government, savers should look to increase contributions further. He adds that while 8% is a great start, 12% is a more realistic figure.
He adds: “But at the moment there seems to be no appetite (from the government) for another increase, which is very disappointing and rather worrying. It will be interesting to see how the government keeps people onboard and gets them saving more.”