Pension contributions increase for automatic enrolment pensions

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If you’re in a workplace pension through automatic enrolment, the amount you’ll pay into it from April 6th will increase. Find out about your pension contributions increase and how much more your employer will pay.

Pension contributions increase – who is affected?

If you’re in a workplace pension but you’ve not been automatically enrolled, then you won’t be affected. This could include people who joined their employer’s pension scheme before automatic enrolment was introduced or where the pension contributions are already higher than the minimum amounts set out by law.

SAVVY TIP: Automatic enrolment means you’re put into your employer’s pension without having to sign up. You can opt out if you want to.

However, if you have been automatically enrolled into your workplace pension and you are currently paying 3% of your salary, you will have to pay more from April 6th. This is when your pension contributions increase and when your employer has to pay in more to your pension for you.

How much extra will you pay?

Until April 5th, 2019, people who are automatically enrolled pay in 2.4% of their salary into their workplace pension. They then receive 0.6% by way of tax relief from the government and their employer has to pay in 2% of their salary, making a total of 5% in all.

SAVVY TIP: Tax relief means that some of the money you’d normally pay in tax is paid into your pension. If you are a higher rate taxpayer, you can claim back extra tax relief through your self assessment form if your pension contributions aren’t made from your untaxed earnings. You can read more about tax relief on pensions in my article. If you pay income tax in Scotland, the tax relief you can claim will be based on the income tax rate you pay. The only exception is if you pay tax at the new starter rate, in which case you can still claim tax relief at 20%.

From April 6th 2019, the pension contributions increase means employees and other workers will pay 4% of their salary into their pension, government tax relief will be 1%, and their employer will pay in 3%, making a total of 8% in all.

What difference will the extra contributions make?

There are two ways to look at this. The first is the difference it will make to your take home pay. The second is the difference it could make to your pension fund when you retire.

If you earn £27,600 a year (before tax), which is close to the UK average salary, your monthly contribution into your pension is £53.92 in the tax year 2018 – 19. That includes £10.78 of tax relief.  That’s according to the Money Advice Service’s workplace pensions calculator. It could be lightly more, depending on how your contributions are calculated. Adding in your employer’s contributions of £35.95 would give a total of £89.97 a month. That adds up to £1,079 a year. These figures assume you pay tax at 20%.

After April 6th, your pension contributions increase to £89.97 a month. That includes £17.97 of tax relief. Adding in your employer’s contributions of £53.92 would give a total of £143.79 month. That adds up to £1,725.48 a year. These figures assume you pay tax at 20%.

The extra money you’ll have to find each month works out at £36.05 – call it £36 a month. That’s just over £1 a day. That may feel like a lot if money is tight, but, I’d urge you not to opt out of your workplace pension without thinking about it long and hard.

Ask yourself:

  • If I don’t save for my retirement through my workplace pension, how will I do it? Relying on the state pension alone isn’t an option. Not only is it less than most people want to retire on, but the state pension age is rising. For people in their 30s, they may not get their state pension until they are 69 or .older
  • If I decide to opt out of the pension now, how much could I lose out by doing so? All the time you’re not paying into your workplace pension you’re missing out on contributions from your employer. Taking the example above, that could work out at £647 over a year that you wouldn’t get from your employer.

How much extra could you receive?

If you paid in an extra £36 to your pension every month from the age of 25 to 55 (which is the earliest you can get access to your pension), you could receive an extra £17,690 in your pension fund. This is very much a guess/estimate because it will depend on what your money is invested in and how well – or badly – these investments perform. It will also depend on how much you pay in charges. The lower the charges, the less of  your return that will get eaten away.

For this result of £17,690, I’ve assumed that your investments grow by 2% a year once the effect of charges have been taken into account. That’s a fairly modest growth level over the long term. Your pension fund may well do better than this, although, of course, there’s no guarantee – and it could do worse.

Opting down

Some pension schemes will let you do what’s called ‘opting down’. This means that you will be able to carry on paying into the pension but at the old rate of 3% of your salary. However, I wouldn’t advise this if you can scrape together the money to pay the higher pension contributions. The reason is that once you stop paying the legal minimum rates, your employer doesn’t have to contribute on your behalf.

Related articles:

How to avoid retiring on £23 a day

Tax relief on workplace pensions

Understanding pensions automatic enrolment and decisions you’ll have to make

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