A surprise in store for auto-enrolled pensions
The introduction of auto-enrolment in workplace pension schemes was widely lauded for encouraging many more people into saving for their retirement. Indeed, the Office for National Statistics (ONS) reports that nearly 10 million more people have started contributing to workplace pensions since the launch of auto-enrolment in 2012.
Auto-enrolment has resulted in an estimated extra £20 billion in contributions to workplace contribution schemes – but contribution rates are still relatively low, and it is widely considered that more needs to be done.
Many of those people who started contributing to their pension savings relatively recently, however, will find that the amount they pay will go up with effect from the start of the new tax year on the 6th of April – a significant increase for the third year running.
Quoting figures from the Department of Work and Pensions (DWP), the BBC reported on the 17th of February that, in the tax year 2017/18, the law set employees’ minimum contribution rates at just 1% of salary (with the employer contributing a further 1%). The following year those rates rose to 3% for the employee and 2% for employers. This current round of increases sees minimum contribution rates go up to 5% for employees and 3% for employers – making total pension contributions of 8%.
As the Pensions Regulator points out, the law sets out the minimum contributions that must be made but reminds employers that they may decide to make the full 8% payment on behalf of their employees, so that the latter do not have to pay anything at all.
Eligibility for auto-enrolment applies to those currently earning between £6,032 and £46,350 a year – a range which is reviewed by the government each year.
Will auto-enrolled contributors now opt out?
Just as certain employees may be auto-enrolled into a workplace pension scheme, they also retain the right to opt out – although they must be automatically re-enrolled regularly (typically, every three years, says the Pensions Advisory Service)
There is some concern across the pensions industry that a third increase in employee contribution rates in as many years – an increase from 1% to 5% - may have the unwanted consequence of more employees opting out.
As a sweetener, and to help counter-balance the negative effect on take-home pay, however, the new tax year also sees an increase in personal tax allowances – which go up from the current £11,850 to £12,500 on the 6th of April.
With both the increased pension contribution and the personal tax allowance taken into account, therefore, an individual earning £15,000 is likely to see their take-home pay fall by only £49 a year, while someone earning £30,000 will be paying a net total of £253, according to estimates cited in the BBC’s report.
When this apparent "cost" is viewed against the longer-term benefits of remaining in a workplace pension scheme and saving for the future, relatively few employees, in fact, may decide to opt out.
In a story from the 24th of August last year, for example, the Guardian newspaper noted that opt-out rates had initially been expected to be around 28%. Yet after that year’s increase in contribution rates, opt-outs rose from 7.98% to 8.18% - an increase in the number of employees leaving their auto-enrolled schemes of just 0.2%.
All eyes will be on whether this small percentage drop-out rate continues after the current increase.
The data used in this article is correct at the time of writing