In case you are tempted to opt out of pension auto-enrolment - stop, read, reconsider
Were you one of the millions of workers whose heart sank when you read headlines saying your pay was about to be ‘hit’ by upcoming changes to auto enrolled workplace pensions? There were alarmist articles all over social and traditional media about how workers take home pay was set to fall, as they were ‘made’ to contribute more to their pensions. It’s not helpful that this coincided with a time when we already face so much uncertainty (Brexit – let’s leave it there). The attention grabbing headlines did not explain the whole story, however, which is much more promising than you might have been led to believe.
It is true that contributions into workplace auto enrolment pensions have risen from 6 April 2019. But that mysterious pension pot that the increased cash is going into is ‘your’ future pay packet. That little pot of money, due to start getting bigger, faster, will be playing Santa Claus (delivering a regular ho, ho, ho) when you retire from work but still need some money to continue enjoying life.
If you sit back and take a moment to think about it, that cash, being drip-fed, month by month, is a savings plan for your future self.
Far from being doom and gloom, the news is actually better the more you read into the detail. After 6 April, the amount that your employer pays towards your workplace pension, through auto-enrolment, will also increase. So both of you are adding more cash and helping your future self’s pension pot get bigger, faster.
What’s the hit going to be in my pay packet now?
For many people the changes are likely to appear minimal. Average earnings are now rising by 3.4% and the personal tax allowance is increasing, from £11,850 to £12,500. When these consideration are factored in, you may see little visible change to your take home pay. And what you don’t see (quietly going into your pension pot) probably doesn’t hurt you. Right?
The actual change, from April 2019, is that what is automatically taken from your salary, and invested towards your pension, will increase from 3% to 5% as a proportion of qualifying earnings (which for 2019/20 is between £6,136 and £50,000). The contributions made by your employer will rise from 2% to 3% of those earnings.
If you are lucky and working for one of the many employers who go beyond their duty and make contributions based on total pay, the employer percentage could be even higher. Whatever the contribution your employer is making remember – that is free money!
Check your employers scheme to see what level of contributions they offer, many offer to match-fund far above the auto enrolment levels, for example they might offer a basic contribution of 3% of salary and match a further 5%. You should really try to make the maximum contribution for the match-funding. The government also gives tax relief on pension contributions. For a basic rate taxpayer, a £100 contribution to your pension will only cost you £80 thanks to the 20% tax relief. (Higher tax brackets will receive an even larger percent of relief). That is money you otherwise wouldn’t have, so in effect - free money.
The numbers for the average UK worker
The median UK salary is now £28,677. The table below shows that on that salary you will only see a reduction of £17 per month from take home pay. And in total, you’ll accumulate £672 into your pension over the year.
In case you are tempted to opt out– stop, read, reconsider
If you opt out, you’ll be losing your employer’s contribution and tax relief from the government, which is, in effect, free money.
Waiting until later to start saving means you will have less time to benefit from compounding interest (that is interest on your investments which is automatically invested again – potential investment growth on investment growth). And that helps your pension grow faster.
Now that more people have a pension, talking about saving for your future life, becomes easier, and that could make a nice diversion from dinner table talk about house prices and school places.
We cannot provide investment or pension advice; please speak to an independent adviser should you be uncertain what is appropriate for you.