Reasons to be cheerful about new pension rules
AHIKE in the minimum amounts that can be saved into workplace pensions is unlikely to trigger large numbers of people opting out, analysis suggests.
The minimum contributions paid into automatic enrolment workplace pension schemes will increase from April 6.
Research from mutual insurer Royal London suggests the step up in pension contributions is “highly unlikely” to lead people to ditch workplace pension saving in high volumes – and some employees may still see their take-home pay increase.
Currently, the minimum contribution rate is five per cent of qualifying earnings, made up of a two per cent minimum employer contribution rate and staff making up the three per cent difference.
But from April the minimum rate will be eight per cent, with employers contributing at least three per cent and staff paying in five per cent.
The moves are part of efforts to encourage people to put away more money for their retirement.
So far, around nine in ten people who have been automatically enrolled have remained in their pension – but there are concerns that people are still not saving enough and minimum contribution rates are gradually being phased upwards.
To gauge what opt-out levels might look like, Royal London examined people’s responses to a previous increase in minimum autoenrolment contributions in April 2018. From April to June 2018, Department for Work and Pensions (DWP) figures showed the percentage of newly-enrolled workers who actively opted out of pension saving, rather than simply changing job, was less than six per cent – lower than in the previous quarter.
Royal London did find that there was a small increase in the percentage of workers already in pensions who ceased pension saving in the April to June 2018 quarter – but it said this increase was due to higher income groups, suggesting this was more to do with factors such as limits on pension tax relief for high earners rather than the rise in contri- butions under automatic enrolment.
Meanwhile, Royal London said the impact of more money coming out of people’s pay packets and into their pensions will be cushioned by various other changes outside of pensions, such as pay rises which often kick in at the start of a new tax year and the rising income tax personal allowance.
Its calculations suggest that, taking these other factors into account, a worker currently earning £20,000 per year who gets a pay rise in April may still see slightly more in their net pay, despite more money also being siphoned into their pension.
Sir Steve Webb, a former pensions minister who is now director of policy at Royal London, said: “The figures suggest good reason to be optimistic about the impact of the next step-up in contributions.
“A very timely increase in the taxfree personal allowance, plus a large rise in the national living wage will all help to boost pay packets in April.
“For a typical worker who gets an average pay rise, we find that their take-home pay will still go up in April, even allowing for the increased pension contributions.
“The bigger challenge is likely to be getting those eight per cent total contributions up to more realistic levels in future.”