In less than a month’s time millions of people saving in workplace pensions will see their monthly contributions increase as part of the Government’s ambitious ‘automatic enrolment’ reform programme.

At the moment, all UK employers are legally required to enrol employees aged 22 and over who earn £10,000 or more into a company pension scheme.

Minimum total contributions are currently set at 2% of earnings between £5,876 and £45,000 (known in the jargon as ‘relevant earnings’), with employees and employers both paying in 1% (including tax relief).

Participating in a workplace pension is entirely voluntary – if you want to, you can ‘opt-out’ of saving for retirement at any stage. However, you will miss out on the double bonus of the employer contribution and pension tax relief. To date the vast majority (about 90%) of employees have chosen to stay in their auto-enrolment scheme.

From April 2018, minimum total contributions will rise to 5% of relevant earnings, with a further rise to 8% scheduled for April 2019. Table 1 shows the split between employer contributions and personal contributions.

IN NUMBERS

Table 2 gives you an idea of how much extra could go into your pension as auto-enrolment minimum contributions rise. Someone earning £27,000 – around the average UK salary – will see their personal contribution rise from £169 in 2017/18 to £517 in 2018/19. For a person earning £45,000, the amount going out of their salary will rise from £313 to £958.

While this might sound like a lot – and some will inevitably be tempted to stop saving in their workplace pension as a result – breaking it down into monthly and daily amounts makes it look a lot more manageable.

Considering the example of someone earning £27,000, their monthly personal contribution will increase from around £14
to £43 – that’s an extra £29, or less than £1 a day.

It’s also worth remembering that while the increased contribution might feel a bit like a pay cut, in reality your employer will likely have held back on wage rises in order to factor in the cost of auto-enrolment. So if you do opt-out, you’re effectively taking a voluntary pay cut.

OVER THE COURSE OF YOUR LIFE

You should also think about where the auto-enrolment minimum will get you to over a normal working life. Even after the rise in contributions to 8%, our modelling suggests the average UK earner might end up with a fund worth about £218,000 after 40 years of saving.

While that might sound like a lot, it will only buy a healthy 65 year old a single-life, inflation-linked annuity worth about £7,800***. With the full flat-rate state pension worth just over £8,000 a year, that gets you to a total retirement income somewhere between £15,000 and £16,000.

The message? Auto-enrolment will only get you so far, and many will need to save well above 8% in order to fund the retirement they want.

TOM SELBY, senior analyst, AJ Bell

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