Workplace pensions set for £160k bonanza
STEEP rises in workplace pension contributions from next month will boost retirement pots by more than £160,000, new figures show.
However workers are being warned that if they refuse to pay the increased amounts and opt out of schemes they risk poverty in old age.
If auto-enrolment contributions stayed as they are, a worker on an average salary of £27,000 would build a pension fund of £56,965 over 40 years.
But with the planned increases that pot would soar to £218,791 – a rise of £161,826.
A worker earning £20,000 could see their pension fund boosted by £100,000 and the impact for those on £45,000 or over is even more significant.
From April 6 the minimum amount auto-enrolled savers have to contribute is going to triple from 0.8 per cent to 2.4 per cent. That rises to three per cent when tax relief is included.
Resist
A year later it will increase again to four per cent, which equates to five per cent including tax relief – a five-fold increase over the next 13 months.
For average salary earners, this will see annual pension contributions increasing from £169 now to £517 next month and £876 in April 2019.
Experts are warning hard-up workers not to be put off by the increases.
Tom Selby, senior analyst at AJ Bell, said: “The increases might feel significant but they are absolutely necessary. At current minimum contribution levels people’s pension savings are simply not going to be enough.
“If at all possible people must resist the urge to opt out. Someone on £27,000 will see just £29 extra a month going into their pension, less than £1 a day.
“Anyone considering opting out needs to think long and hard about what it will mean for their long-term retirement prospects. They would face living on the state pension, which is currently worth under £160 a week.”
Auto-enrolment pension contributions are based on “relevant earnings”, which is salary above £5,876.
Almost nine million workers have been included in schemes since autoenrolment began in 2012, adding to the 10.4 million who were already members of qualifying pension schemes.
Kate Smith, head of pensions at Aegon, said: “This will be the first big test of auto-enrolment. Policymakers and the pension industry will be on the edge of their seats as they wait to see how employees and employers react.
“Many already pay pension contributions above the new auto-enrolment minimums so won’t be affected, but poorer workers could have a dilemma.
“Employees will need to balance short-term benefits against the much more valuable longer-term benefits of keeping on saving.”
‘Workers who decide to opt out of auto-enrol schemes risk poverty in old age’