Pension contributions of UK workers is set for a mandatory increase from next week
Pension contributions of UK workers is set for a mandatory increase from next week as part of the latest stage of the country’s auto-enrolment programme. From 6 April, the minimum contribution for staff automatically enrolled into a workplace pension scheme will rise from 2% to 5%. This will include 3% contribution from the employee and 2% from the employer. Employees can pay less if their employer’s contribution brings the total payment into the scheme to 5% of salary. Minimum contributions will increase again from 6 April 2019, to 5% for employees and 3% for employers.
However, some experts have warned that this may lead many workers to opt out of their pension scheme.
Retirement expert at Prudential, Vince Smith-Hughes said that many young people say they do not have the spare cash to save and there is a danger that the increase in contributions leads to more people opting out. It’s important to remember that responsibility for saving for retirement has shifted from government to individuals over recent times and the best approach is to save as much and as early as possible.
Head of defined contribution pensions at Newton Investment Management, Catherine Doyle called for the government to review the balance between employer and employee contributions. She added that the stark fact remains that, while the industry acknowledges that significant progress has been made, the elephant in the room remains that individuals are still woefully unequipped to fund an increasingly lengthy retirement period.
She added that while contribution rates are hugely influential in building up a decent-sized pot, so is having an investment strategy that delivers solid, long-term returns. As pot sizes grow, attention may well turn to what is under the bonnet of default strategies, particularly in the context of increasingly volatile equity markets and the need to maintain opt-out rates at low levels.
According to the latest data from the Office for National Statistics (ONS), overall membership of workplace pensions had grown from 67% to 73%. However, the data also revealed that nearly half of those contributing to a private sector pension paid in less than 2% of salary.
The general secretary of the Trades Union Congress, Frances O’Grady welcomed the improved coverage but argued that employers were “putting in the bare minimum”.
However, according to a separate survey from Royal London, nearly four out of five firms considered pension provision an important benefit to offer new and existing employees. Employers also said they would be prepared to facilitate automatic increases to contributions whenever basic pay rose. Two-thirds (66%) backed this, while 62% said they would match any such increase.
This article is for information purposes only.
Please remember that financial investments may rise or fall and past performance does not guarantee future performance in respect of income or capital growth; you may not get back the amount you invested.
There is no obligation to purchase anything but, if you decide to do so, you are strongly advised to consult a professional adviser before making any investment decisions.