Prepare yourself for a hidden financial boost
THIS is a warning to every UK worker aged 22 or over. You’re about to get a pay rise, but it may cost you, and you may not even be told. This is all about ‘auto-enrolment’, where your employer must contribute towards your pension, and from April 6, it’ll have to give you even more.
The auto-enrolment rule means employers must opt in all employees over 21, who earn £10,000 from that job, to pay towards a private pension.
This is to provide money for you in later life, on top of the state pension. In other words, even if you do NOTHING, some of your salary will go towards saving for a pension rather than be part of your take-home pay.
Yet if you do this, the firm must also contribute extra to this pension fund. From April 6, the new tax year, the minimum amount you and your employer will contribute is increasing substantially. The effect of that is a bit of a mind twist…
EVERYONE WHO IS OPTED IN EFFECTIVELY GETS A PAY RISE…
as your employer is giving you more money, even if it’s not immediately usable. ■
EVERYONE WHO IS OPTED IN GETS LESS TAKE-HOME PAY…
To get the extra money, you’ll usually have to contribute more too; so your disposable income is reduced.
Thankfully this will be offset by income tax thresholds increasing at the same time (see mse.me/taxcalc).
If your company gives you a final salary pension, where the amount you get is based on the number of years you worked for it and your final salary, it means you’re part of a different scheme. If it meets minimum government standards for things such as charges, default investment funds, and not just contribution amounts, joining auto-enrolment doesn’t apply.
The April 6, 2019 changes
THE minimum auto-enrolment contribution rises to 8% (from 5%) of your pre-tax salary above £6,316 and below £50,000.
The minimum your employer has to contribute increases to 3% (from 2%) of your salary between the limits above.
If your employer only puts in the minimum 3%, your contribution will automatically rise to 5% to meet the 8% total without you doing anything. If your firm puts in more than the minimum, your contribution won’t need to rise as much.
Opting out is a mistake for most
IF YOU want to, you can opt out of contributing to your pension, yet don’t do it unless it’s a last resort – that means you’re effectively giving up extra money from your employer.
If you’re struggling, you may be tempted, as losing disposable income is hard to bear. Yet I’d only consider it if you’ve very expensive debts like payday loans, in which case clear them, then opt back in; if you’re near retirement with little savings, there is a rare scenario that having a bigger pension pot could reduce your benefits, or if you already have a very large pension and it’ll take you over the £1.03m lifetime allowance.
Otherwise steer clear. Opting out runs the risk of a cold baked bean retirement, as whether in future the state pension alone will be enough to live off is questionable. This is about saving now, so your living standards don’t plummet later.
■ Martin Lewis is founder and chair of Moneysavingexpert. com. Go to moneysaving expert.com/latesttip to get his free Money Tips email.
You’ll get more money from your employer If you opt in