Auto enrolment: hold your nerve for the next increase

On 6^th April, the rules around auto enrolment contributions to workplace pensions will change for the second time in a year. Last April, total contributions increased from 2% to 5%, with the amount paid in by an employee potentially trebling from 1% to 3% as under the new rules, employers only had to pay in 2%. Now, the total is set to rise again to 8%, with only 3% required from the employer. While many employers will pay in more than this, there is still a good chance that an employee’s contributions will rise to 5% - a huge jump from the 1% of two years ago.

With some people potentially baulking at the idea of seeing less cash in their pocket each month, Andy James, head of retirement planning at Tilney, looks at the pros and cons of opting out of a scheme.

“From this month’s payday, those in an auto enrolment workplace pension scheme will notice the contributions increase fairly significantly. This may feel like quite a pinch and it is understandable that people do not want to lose more of their disposable income each month. Some employees will already be paying more than the minimum contribution so will not notice this hike so severely. But for those who don’t feel like they can afford it, opting out of their scheme altogether may seem like the only option.

“If people do choose to opt out of their auto-enrolled pension scheme, they need to seriously think about how this may affect their retirement. The money you save earliest in your career is the money that works hardest for you throughout your life, until retirement. Choosing not to contribute any more to your pension means you will be starting from a much smaller pension base when you retire and there is a good chance you will not have enough to fund the lifestyle you want.

“There are obviously other vehicles people can use to save tax efficiently for retirement, and they may choose to put 2% into an ISA or if they are under 40 a Lifetime ISA every month if that is all they can afford. While it is obviously a good thing to still be saving and a Lifetime ISA would attract a 25% government bonus on top of their contributions, they will be missing out on employer contributions and potentially tax relief too. So only saving 2% a month to try and save that extra 3% is actually a completely false economy as you will be missing out on an additional 3% contribution from your employer, so turning down free money.

“For those who are really struggling, it is always worth speaking to your employer. If an employer agrees to pay more than 3%, the individual’s contributions will decrease accordingly. The government is not actually going to want a generation with no pension as that is very bad news for the economy in the long run. They may have underestimated how this would affect workers, or they may be relying on people’s apathy where they just ‘can’t be bothered’ to change their scheme.

“The most important thing for people to do is to get their finances in order and truly understand how these increases will affect them going forward. With the current unstable political landscape, none of us can second guess what changes might come in in the future and planning ahead has never been more important.”