From April 6 2019, automatic enrolment minimum contributions will rise from 5 to 8 percent, under the default qualifying earnings basis. With employee and employer contributions both going up, are you one of the many affected?
*Employee contributions are quoted gross of tax
This represents an increased cost for employer and employee alike. It will affect people’s take-home pay and a company’s bottom line. However, I believe this increase is essential if individuals hope to have a decent standard of living in retirement.
I think a decent argument could be made to further increase the minimum level of contribution, but the official government position is that there are no current plans to increase the minimum levels.
There is a proposal on the table that, from 2024, the lower band of earnings might be scrapped, meaning that ‘band earnings’ will start at the first pound of earnings. Under current regime the first £6,032 (£6,136 from April 2019) of salary can be ignored when calculating minimum pension contributions.
By starting from the first pound of earnings, the lower paid would see their contributions increase dramatically. For example, the earnings trigger for automatic enrolment is £10,000. Based on the April 2019 total contribution rate of 8%, the annual gross amount contributed by someone on £10,000 would be £309.12. If you remove the £6,136 bar, and start from the first pound, the contributions rise to £800. An increase of 158 percent!
Another strategy would be for people to start saving for their pension earlier. Automatic enrolment rules don’t automatically apply to workers under the age of 22. There is a possibility this may be lowered to 18 and this not only gives four extra years of pension contributions but it also means four more years of potential investment growth. But perhaps more crucially it fosters a culture of saving at a young age and could have a lasting impact on the next generation of savers.
Automatic enrolment has been a great success. Today, around 84% of workers are in a company pension scheme. Nearly £90bn a year is paid into schemes. The increase in contributions is another step in the right direction. However, if you are serious about having a comfortable retirement then you will need to give consideration to contributing more than the statutory minimums.
If you have any questions about your pension, and whether or not your current contributions are sufficient, please speak to your Courtiers adviser or contact us.
Tax treatment depends on individual circumstances and may be subject to change in the future.
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