Everyone needs a pension – that is a legal requirement, not just an opinion. This is why Auto enrolment was introduced.
More than 800,000 employers and eight million workers now have workplace pension schemes. But the job is not over yet, and whether you are an employer or an employee there are some important changes.
Contributions are going up
Current contribution rates are unrealistically low – certainly far too low to build up the kind of pension pot needed for a comfortable old age.
Of course, contribution rates were set at a minimum, to overcome concerns about costs. During this introductory phase, they were just 2% of qualifying earnings, with at least 1% coming from the employer. (Qualifying earnings are those between £5,876 and £45,000) However, on 6th April this will rise to 5% – typically 2.4% from the worker, 2% from their employer and 0.6% in tax relief.
In April 2019, there will be a further increase to 8% (7% if contributions are calculated on all earnings) with a minimum of 3% from the employer.
It means the workplace pension scheme will cost more for both employers and employees.
If you are an employee
Employers are less than generous with pay rises in the current climate, and you may find that the increase in your statutory contributions means you are taking home less when money is already tight. You might be tempted to opt out of your workplace pension to have a little more cash to spend now.
This would almost certainly be a mistake. Not only would it mean not having that workplace pension building up for your retirement, it would mean you would actually be earning less.
Remember, if you are in a workplace pension scheme, your employer must pay into your scheme for you. You might not be able to spend the money now, but it is really there and working for you. From next year, when contributions go up again, it would mean turning down an extra 3% from your employer, every time you get paid.
If you are an employer
An increase in the contributions you must pay for your staff is never welcome, but it is unavoidable. However, one of the main issues about workplace pensions was the time and trouble of setting them up. With your scheme now in place, and probably integrated with your payroll system, there will be no extra impact on administration, and the extra costs of the contribution themselves can at least be set against profits to reduce your corporation tax liabilities.
What should you do?
The simple answer is that you should pay the extra contribution, and if you are an employee, welcome the chance to increase your pension savings.
But you should probably not relax thinking that you have all the pension provision you need. Even with the projected increases, the level of saving in the workplace pension will still not be adequate to prepare for a comfortable retirement.
With a State Pension worth £159.55 per week, your workplace pension will have to work very hard to provide the income you need. You might still need another source of retirement income, besides your AE pension.
It might be time to talk to the Continuum team about your retirement plans, and how you could set up a private pension of your own.
The Financial Conduct Authority does not regulate auto-enrolment.
The value of pensions can fall as well as rise, you might get back less than you invested.