Pension auto-enrolment minimum contributions will rise to 8% on 6 April, with a minimum contribution of 3% by the employer and 5% from the employee.
Ten million workers are now saving into a pension since the government introduced the auto-enrolment scheme back in 2012. Staff are currently required to contribute 3% while employers must pay in 2%. The change in contribution levels means that the average UK worker’s pension payments are set to rise by £700 a year.
Speaking to HR magazine Ros Altmann, former pensions minister and campaigner, welcomed the move and said that she didn't anticipate higher opt-out rates despite the increase.
“The increase in auto-enrolment minimum contributions will finally see the auto-enrolment programme fully in place. The increase in contributions will be offset by the large rise in personal tax allowance, which will lessen the impact on take-home pay,” she said.
“The behavioural benefits of the programme have been significant and the power of inertia should keep opt-out rates low. Last year's contribution increase had virtually no impact on opt outs and I expect the same again.”
Altmann added that employers should make the most of technology that will improve access to pensions: “I think the payroll industry and employers have done brilliantly to get the project this far but I hope the next stage will be to embrace technology, which can reduce the costs and increase the accuracy, security and efficiency of making regular contributions for so many millions of people. Manual uploading of CSV files and use of spreadsheets urgently needs to be replaced with automatic integration that can handle the tasks better and deliver fewer errors in a more GDPR-compliant manner.”
Jeanette Makings, head of financial education at Close Brothers, said that the increase will help to improve the pensions savings gap. “Auto-enrolment has transformed the savings landscape in the UK, with government and employers alike working towards solving the retirement savings gap. It’s fantastic to see previously disenfranchised demographics being more involved in planning for later life, and the low levels of opting out of the scheme are evidence that the programme has been successful for many workers,” she said.
The rise in minimum contribution levels, which follows an increase in April 2018 to 5%, comes amid concerns that many employees are not saving enough for retirement. A recent report from the Pensions and Lifetime Savings Association (PLSA) found that half (51%) of employees wrongly believe the minimum auto-enrolment contribution level is the government’s ‘recommended amount’ to save, and it called for the minimum level to be raised to 12% between 2025 and 2030 to ensure future retirees will be financially secure.
Makings added that employers have a responsibility to educate staff around pensions to ensure they save enough for retirement: “We still have a long way to go. People are not saving enough into their pension for a comfortable retirement – the bare minimum will not suffice. This gap is caused by a deficiency of knowledge and interest, with a third of employees admitting to never reviewing the amount that they are saving into their pension and almost half of those approaching retirement feeling unprepared and out of their depth. Employers have a duty to support their staff, providing education about the real cost of retirement and guidance as to how to get financially ready, including saving early and often to reach your financial goals.”
The increase coincides with the government announcement that pension providers will be forced to feed data into their pensions dashboard. The pensions dashboard will allow savers to log in and view all of their pension pots, including state pension details, in one place and gain insight into their expected income after retirement.
While it has been confirmed that the state pension will be included in the dashboard, a deadline has not yet been confirmed for this.
“While it’s great to get confirmation that the state pension will be included on the pensions dashboards it’s concerning that there is no timescale or deadline being set for this being delivered,” said Kate Smith, head of master trust at Aegon.
“For many people the state pension forms the core of their retirement plans and is required for the pensions dashboard to provide the fullest and most accurate account of someone’s pension savings.”
