There’s just over a month to go before millions of workers will see their workplace pensions contributions increase to help boost their incomes at retirement.
Under the auto-enrolment system, which was introduced in 2012, employers must by law automatically enrol their workers into a company pension scheme into which both must contribute.
Auto-enrolment has dramatically increased the number of people saving for retirement, with more than 10m people now saving into a workplace pension, according to latest figures from the Pensions Regulator.
Workers currently must pay at least 3% of their ‘qualifying earnings’ into their pensions, whilst employers must contribute 2%. These contributions will increase to 5% and 3% respectively from the beginning of the 2019/20 tax year on April 6.
However usually contributions are based on a set band of earnings which for the 2018/19 tax year is between £6,032 and £46,350 a year, so the first £6,032 of your earnings isn’t included. The band of earnings lower limit will change to £6,136 in April, whilst the upper limit will increase to £50,000.
So, for example, if you earned £26,000 a year, once the 2019/20 tax year starts, your contribution would only apply to £19,864 of your salary, i.e. the difference between £6,136 and £26,000.
Why opting out could prove a costly long-term mistake
It is possible to opt out of auto-enrolment but doing so means you’ll miss out on valuable employer contributions, as well as generous tax relief. If you’re a basic rate taxpayer, a £100 contribution into your pension will only cost you £80, or just £60 or £55 if you’re a higher or additional rate taxpayer.
Melinda Riley, pensions expert and head of technical and advocacy team at the Single Financial Guidance Body said; “Most people would like to be able to choose to stop work one day and choose how they live. We would encourage everyone to keep paying into their pensions pot if at all possible, because this give you more choice over how to live your later life.”
Although workers’ take-home pay will reduce once the contribution limits rise, the changes will boost the amount received at retirement.
Kate Smith, Head of Pensions at insurer Aegon, said: “Pensions are part of people’s pay packet. For someone earning £15k, the reduction in take home pay results in an extra £261 contributed to their pension each year, a significant amount of which comes from the employer.
“We hope that people will take a long- term view on their pension contributions as opting out is likely to make saving for retirement later much harder by reducing the length of time pension contributions can benefit from investment returns. Putting off pension saving could turn out to be harmful in the long term.”