Articles

What the 2019 pensions increase means for you

Workplace pensions have made a big difference to the saving of millions across the UK, but the minimum contributions expected from employees and employers have risen. 

7 minutes

  • Minimum workplace pension contributions have increased to 5%
  • Larger contributions may mean you need to adjust your budgets, but should mean a more comfortable retirement
  • Not all savers are entitled to workplace pensions and so may need to prioritise saving in a personal pension.

Has your retirement fund just had a boost?

The government first started phasing in its workplace pension scheme back in 2012.

The idea was simple - employees would be required to enrol their staff in pensions, and to contribute towards that pension alongside the employee.

As a nation we weren’t saving anywhere near enough to cover our needs in retirement, and so by giving us a prod to get started on that pension saving, the hope was that we would all be a little more financially secure when the time comes to retire.

It’s certainly proved effective so far. In February, the auto enrolment scheme passed the milestone of having 10 million savers enrolled in some form of workplace pension.

While the minimum contributions from employers and employees were set at modest levels, they were increased in April 2018 and have risen again this past April (2019).

How big is the pension contribution increase?

At the moment, if you are enrolled in a workplace pension, each month the equivalent of 5% of your salary is going into your pension pot. Two perfect of that sum is paid by your employer, while you pay the remaining 3%.

From April 6th onwards, your contribution increased to 5%, while the payment from your bosses will also be going up, to 3%. As a result the total contribution will be worth 8% of your monthly salary.

Why increased pension contributions are welcome

The increased contribution levels are good news, in that you’ll be saving more - and getting more additional money from your employer - in your pension pot. As this money is invested, it has the potential to grow into a far more significant sum, meaning you will be more comfortable in retirement, and less reliant on the state pension.

Ian Neale, director of pension experts Aries Insight, points out that it’s incredibly difficult to save a sufficient pension pot without a helping hand.

“Which is why auto-enrolment is a blessing; money you've never had you don't miss, so the saying goes, and with a valuable boost from your employer, you're quids in,” he adds.

Jamie Smith-Thompson, managing director of advice firm Portafina, said that while the increase in contributions may feel “daunting or off-putting at first”, they could mean that you enjoy the security of a larger pension pot when you most need it.

Can I afford these larger pension contributions?

However, it’s worth noting that many people struggle to make their salary last to the end of the month as it is, and so losing another 2% of their pre-tax salary each month could present some budgeting challenges.

As Neale notes: “Many of us have found annual pay rises have been hard to come by in recent years, so it's a challenge; it may mean a noticeable cut to take-home pay.”

However, Smith-Thompson downplayed the likely impact of the rise in contributions, noting that the money is taken from your pay packet before it reaches your bank account.

So, unlike if you wanted to increase your contributions to your personal pension, you don’t need to find any additional money once your pay is in your hands,” she added.

Nonetheless, it’s a really good idea to go through your usual spending habits to see if there are any areas where you can cut back, to ensure that these larger contributions do not leave you financially stretched.

An excellent place to start are your various monthly bills. For example, around 11 million households are currently on their energy supplier’s standard tariff - the most costly tariffs around - and could save hundreds of pounds by moving to a new fixed tariff.

Do this for all of your usual bills and the extra pension contributions should not leave you out of pocket.

What about a personal pension?

Not everyone will be comfortable giving up such a sizeable portion of their wages each month towards their pension, even with the knowledge that it is being bumped up further by money from their employer.

If these minimum contributions are beyond your budget, but you still want to keep saving for retirement, then a personal pension is worth considering. You’ll be able to save as much or as little as you can afford each month, pausing contributions if necessary at any time. Your contributions will still benefit from tax relief from the government too, which is paid at your income tax band.

In other words, to make a £1 contribution will cost you 80p if you are a basic rate taxpayer, dropping to 60p and 65p for higher and additional rate taxpayers respectively.

Similarly, it’s worth remembering that not everyone qualifies for a workplace pension. In order to save in the scheme, employees need to earn £10,000 a year, so those on low salaries or part-time workers will need to make their own pension saving arrangements. You also need to be 22 in order to make use of a workplace pension, so if you’re a younger saver a personal pension will be your best bet.

The nearly five million people that are self-employed also don’t qualify for auto-enrolment schemes, so have to make use of a personal pension if they want to save for retirement.

Neale pointed out another group that might prefer to use a personal pension - those earning between £10,000 and £12,500 who are auto-enrolled into a scheme operating the ‘net pay arrangement’.

He explained that this group “which includes low-paid members of many master trust schemes, get no tax relief on their contributions because they don't pay income tax. They would get it if they used a personal pension scheme.”

The increase in minimum contributions is undoubtedly a good thing, as it gives savers the boost they need in building a more substantial pension pot. But there will be some people for whom a workplace pension is not an option, and so saving in a personal pension makes an excellent alternative.