How the auto-enrolment contribution hike will affect workers…and what it might generate in retirement

Tom Selby
20 March 2019

·        Final scheduled auto-enrolment contribution increase will see employees pay up to £787 a year more into workplace pensions from 6 April

·        Average worker earning £30,000 a year will see annual contributions rise by £380 in 2019/20, or £7.30 a week

·        If relevant earnings bands are scrapped – as the Government plans to do by the “mid-2020s” – a 24-year-old earning £30,000 a year and contributing 8% could build up a fund worth £322,000 in today’s prices by age 651

·        This could generate an inflation-adjusted income in drawdown of £16,000 a year until age 942 or buy an inflation-protected annuity worth almost £11,0003

 

Tom Selby, senior analyst at AJ Bell, comments:

 

“While savvy savers are focused on making the most their ISA and pension allowances ahead of tax year-end, workers must also prepare for a significant increase in minimum contributions under automatic enrolment.

“The rise from a minimum contribution of 5% of relevant earnings to 8% from 6th April could have a sizeable impact on someone’s take-home pay. At the top end, someone earning £50,000 would see their personal contribution increase £787 year-on-year, equivalent to about £66 a month or £15 a week.

“For someone earning £30,000 – roughly the average salary in the UK – annual contributions will rise by £380, around £32 a month or £7.30 a week.

“While for some – particularly those struggling to make ends meet – this increase might lead to a re-evaluation of whether to continue saving for retirement through the workplace, experience to-date suggests for the majority inertia remains a powerful force.

“Furthermore, rising average wages mean lots of workers will at least not see a dramatic drop in their pay packet (although real wages could well dip).

“Anyone who chooses to opt-out is basically taking a voluntary pay cut. Employers will have adjusted remuneration packages to take auto-enrolment into account, so if you turn down the matched contribution you won’t get it back elsewhere.”

Total contributions at auto-enrolment minimum (2018/19)

Salary

Employer contribution (2%)

Employee contribution (2.4%)

Tax relief (0.6%)

Total (5%)

£50,000

£806

£968

£242

£2,016

£30,000

£479

£575

£144

£1,198

£20,000

£279

£335

£84

£698

 

Total contributions at auto-enrolment minimum (2019/20)

Salary

Employer contribution (3%)

Employee contribution (4%)

Tax relief (1%)

Total (8%)

£50,000

£1,316

£1,755

£439

£3,510

£30,000

£716

£955

£239

£1,910

£20,000

£416

£555

£139

£1,110

 

1Assumes inflation adjusted annual investment growth of 5%, post charges

2Assumes retirement income rises in line with 2% inflation and investments grow by 5% a year after charges

3Source: Money Advice Service annuity calculator (based on a healthy 65-year-old living in London), 20th March 2019

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