Workplace pension pots set for boost from minimum contribution rates increase
Workplace pension savers will see their minimum contributions increased from Friday, as the next stage in boosting people's future retirement incomes gets under way.
April 6 sees a step up in minimum pension contribution rates under automatic enrolment, which started in 2012 to kick-start a new savings culture amid fears people were not putting aside enough for their old age.
Minimum pension contribution rates under automatic enrolment will rise to a combined 5%, with a minimum of 2% from the employer and the remaining 3% from staff.
Previously, the minimum contribution rate was set at 2%, comprising 1% from staff and 1% from their employers.
In April 2019, the rate will increase again, to 8%, with a minimum of 3% from the employer, leaving a 5% minimum staff contribution.
Minister for Pensions and Financial Inclusion, Guy Opperman, said: "One million employers have played a crucial role by complying with their automatic enrolment duties, helping us get more than nine million people into a workplace pension, so that they can prepare for a more financially secure retirement.
"This week, we mark the next stage in boosting the retirement incomes of workers across the nation."
According to calculations from Aviva, savers on average earnings could see their pension pots quadruple as auto-enrolment cranks up.
Alistair McQueen, head of savings and retirement at Aviva, said the increases in savings will have a significant impact on the retirement fortunes of millions of savers.
He said, based on various assumptions, a 22-year-old saving the previous minimum of 2% could look forward to a pension fund of £40,000 by the time they retire.
Mr McQueen continued: "By saving the higher 8%, this projected outcome rises to £160,000.
"For a 35-year-old, the outcomes are £23,000 and £92,000, at 2% and 8% respectively.
"For the 50-year-old, the outcomes are £9,000 and £36,000, at 2% and 8% respectively."
So far, around nine in 10 people who have been placed into workplace pensions have decided to stay in, rather than opting out.
Mr McQueen said: "Automatic enrolment has been a huge success because it does much of the work for the employee...
"It is one of the few occasions in life where doing nothing pays."
Concerns have been raised that some people seeing more of their pay packet going towards their pension may decide to opt out.
But Sir Steve Webb, a former pensions minister who is now director of policy at Royal London, said the increase in contributions is "a vital next step" towards saving for later life.
He said: "The experience of automatic enrolment to date and from similar schemes around the world is that we will see very low levels of opt outs.
"Those who opt out lose a contribution from their employer and tax relief on their own contributions which could seriously damage their ability to build up a meaningful pension pot.
"The contribution increases in April 2018 and April 2019 will ensure that at least 8% of pay is going into pensions but most people will need to build on this if they want to be able to afford to retire at a reasonable age."
The idea of increasing contributions has been welcomed by savers, with research from workplace pension scheme Nest finding just over three-quarters (76%) of workers placed in a workplace pension agreeing that contributing more is a good idea.
Zoe Alexander, director of strategy at Nest, said: "Contributions are rising in April but for someone earning around the UK's average income this could mean only paying around a pound a day."