· 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
