News Upcoming auto-enrolment pension hike will feel like a ‘harsh jolt’ for employees
Millions of workers who are auto-enrolled into pensions could see deductions from their wages triple when they receive their April wage slip, as the first government-led increase in pension contributions comes into force tomorrow (6 April).
Under auto-enrolment rules brought in by the Department for Work and Pensions (DWP), UK workers who earn at least £10,000 a year pay a government-set minimum contribution into their pensions.
From 6 April, the current 0.8 per cent deduction from employee pay packets will rise to 2.4 per cent, with an additional rise to 4 per cent coming in April 2019.
Employer contributions to pension pots are also set to increase from 1 per cent to 2 per cent of qualifying earnings, with a further increase to 3 per cent from April 2019 onwards.
Rebecca Goldring, tax manager at accounting, tax and advisory practice Blick Rothenberg, warned that the heightened contributions would mean a decrease in take-home pay for many workers.
“With reports that almost one in eight British individuals set to retire in 2018 will rely solely upon the state pension for income, the government is trying to change the status quo by gently introducing workers to saving for their retirement,” she said. “However, for many this increase will feel like a harsh jolt.
“Owing to the squeeze on consumers and the continuing difficulty for people to get on the housing ladder, we may find many, particularly the younger generation, choosing to opt out of pensions in favour of saving for a house deposit or keeping up with living costs.”
A survey conducted by Now: Pensions in December 2017 suggested that 62 per cent of auto-enrolled employees were unaware of the upcoming increases, while figures from Aviva revealed that 4 per cent of employees had decided to leave their scheme in April 2018, with a further one in eight considering the move.
Yet despite warnings the move could cause younger workers in particular to opt out of paying into their pensions, Nathan Long, senior pensions analyst at Hargreaves Lansdown, told People Management that already-stretched pay packets could “easily shrug off” the upcoming rises. Without heightened contributions, he said, retirement would become unaffordable for many.
“While we could see an increase in people opting out of their pension, because people are re-enrolled every three years or if they change jobs, over time saving into a workplace pension will just become the norm,” he said.
“Rising contributions will better prepare people for life after work, and with money from the government and the employer rising at the same time, workers can now look forward to retirement with more confidence. Without this jump in contributions, retirement would be unaffordable for many, and an entire lifetime spent working could become the reality.”
Charles Cotton, senior pay and reward adviser at the CIPD, added that increases in the national minimum wage and living wage for lower-paid workers would hopefully reduce the likelihood of people opting out.
“Many low-waged workers will have received a wage increase because of higher national minimum and living wages, so their take-home pay may not reflect the higher contribution levels,” he told People Management.
“Plus, the rate of increase in the cost of living is set to decelerate over the next 12 months, which should ease cost-of-living concerns.”
In December 2017, the DWP announced that it would lower the auto-enrolment age in an effort to see more workers saving for retirement.
From the mid-2020s, every employee aged 18 or over will be able to save into a workplace pension, pulling an additional 900,000 people into a pension scheme through a widespread extension of auto-enrolment.
As increases to minimum contributions are required by law, HR departments have no obligation to consult with their staff about the changes.
However, Richmal Price, payroll advice team leader at Peninsula Group, said it could be worth opening communication in the long run.
“To avoid queries or questions about pensions, HR should write to all members of staff in advance of April’s pay date to remind them that minimum pension contributions are increasing, and this will affect take-home pay for those who pay at the current minimum contribution,” he said.
“Including an example of how this will affect salaries, and eventual pensions come retirement, will help employees understand this increase on a practical and personal level.”