‘End of the beginning’ for workplace pension changes as contributions increase

The next phase in the workplace pension savings revolution starts from Saturday, when the minimum amounts that can be contributed into pots are increased.

Experts said the change on April 6 marks the “end of the beginning” for automatic enrolment – and the next challenge is to make sure workers are saving enough.

They said it should now become the norm for people to review their pension contributions every time they receive a pay rise – rather than just paying in minimum amounts which may not be enough for the sort of retirement they want.

The step up on Saturday means that a total minimum contribution of 8% of qualifying earnings must be paid into pension pots, of which employers must contribute at least 3%, with the remaining 5% made up by staff.

Previously, total minimum contributions were set at 5%, including 2% from employers and 3% from staff.

This month’s uplift in contributions follows a previous increase in April 2018 as people become more acclimatised to pension saving.

Automatic enrolment was introduced in 2012 to head off fears of a looming old age savings crisis.

Opt-out levels so far have been much lower than previous expectations – with around nine in 10 people staying in their workplace pension.

Sir Steve Webb
Sir Steve Webb

Sir Steve Webb, a former pensions minister who is now director of policy at Royal London, said: “This final step up in contributions marks ‘the end of the beginning’ for this whole exercise.

“Ten million workers have been successfully enrolled and minimum contribution rates have now been stepped up.

“But the crucial work starts now. We need to ensure that no-one assumes that the Government has chosen contribution rates which will guarantee a comfortable retirement.

“Just as saving into a pension has now become a social norm, we need to establish a further norm that people review their contribution rates every time they get a pay increase and gradually step up to the sorts of levels needed for a good pension.”

Alistair McQueen
Alistair McQueen

Alistair McQueen, head of savings and retirement at Aviva, said automatic enrolment has brought a “quiet revolution” to pensions.

He said: “Our next challenge is to ensure that (workers) are saving enough.

“Based on current savings rates, millions may be on track for disappointment.”

Robert Cochran, retirement expert at Scottish Widows, said: “Auto-enrolment has had a positive impact on the nation’s savings and this latest step up in contributions should help to continue making a difference to workers’ pension pots.

“However, we’d encourage people – if they are able – to top up their monthly contributions, as a little extra each month could make a bigger difference in later life than they may expect.”

He also said not everyone is benefiting from the initiative and more workers should be included and continued: “Those earning less than the £10,000 threshold, including those with multiple jobs, are missing out.”

According to calculations from Hargreaves Lansdown, the average worker will see an extra £30 leave their pay packet in April to cover the cost of pension contributions.

But, while people may see more money going out of their wage packet each month, their pension pot could balloon over the longer term.

Hargreaves Lansdown calculates that the change could potentially boost the pension pot of someone aged 22 who only makes minimum contributions by half – or around an extra £55,000 based on average earnings – by the time they eventually retire.

Meanwhile other changes happening at the start of the new tax year may soothe the pain of having more money siphoned out of pay packets.

The personal allowance – the amount of income people do not have to pay tax on – is increasing from £11,850 to £12,500 on April 6.

And some people may also receive pay rises to coincide with the new tax year.

Nathan Long, senior analyst at Hargreaves Lansdown, said: “Lower take home pay could put pressure on families, although these higher contributions have the potential to power up your pension by half, so persevering remains pertinent.

“The scheduled jump in the personal tax-free allowance will also help offset some of this cost.”

The Government has also this week given the green light for pensions dashboards, which should eventually enable people to see all their pension pots in one place online.

The new initiative could make it easier for people to see if they are saving enough for their retirement – or if they need to save more.

While everyone’s needs are different, here are Aviva’s general three rules of thumb to head in the right direction for a comfortable retirement:

1. Save at least 12.5% of earnings towards your retirement including money from your employer and tax relief.

2. Start saving at least 40 years before your target retirement age.

3. Try to build up at least 10 times your salary in your pension by the time you retire.