Pension changes may mean more debt

Empty deckchairsPA

Changes coming in from next October were supposed to help us all be better off. The plan was to automatically put us into our workplace pension scheme, to make sure that we all have something to fall back on when we retire. However, one charity warns that a side-effect could be serious debt problems in the immediate future.

So what's the problem, and what should you do if you are worried about the new rules?

The new rules

The new rules will automatically enroll you in your company's pension scheme. On the plus side, your employer will have to pay a percentage of your salary into the scheme - which will make you better off. However, on the downside, a chunk of your salary will also automatically go into the scheme.

Before anyone starts to stress out, it's worth pointing out that in the early days just 1% of your salary will be deducted. However, over the following five years, that contribution will rise to as much as 4%.

The debt problem

The Consumer Credit Counselling Service says that this could easily be the final nail in the coffin for some people who are struggling with debt. They say that bringing home just £50 less a month would double the number of people with 'no money left to live off' and could easily mean even more fall behind with debt repayments, or build up even bigger debt problems. Already one household in four is behind with their debts - or is 'at risk' of falling behind - which means just a small drop in monthly income could have a major effect.

Someone making £14,000 a year, for example, brings home £990.17 a month. If they were forced to pay 4% of salary into a pension, that would mean bringing home £952.83 a month, and losing out on £37.34 a month. It may not seem like a massive chunk of cash, but the charity says it's enough to make a palpable difference to those on a relatively low wage.

What you can do

The good news is that if you are worried about your income, and if your finances really are on a knife edge, then you don't have to accept membership of the scheme. When you are enrolled by the company, you simply let them know that you want to opt out.

You will have to keep an eye out three years later because you will be brought into the scheme again automatically and if you are still in financial trouble at that point you will have to opt out again.

Of course, it goes without saying that you will pay the price in the long term because you won't have a private pension, and you have to rely on the increasingly worrying state pension. It's therefore worth thinking long and hard whether there are any other sacrifices you can make instead in order to keep paying your debts and be part of a scheme that really will improve your life in the long term.
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