Why it can pay to pay into a pension

Why it can pay to pay into a pension

new pound coin

The vast majority of employers Prospect deals with have a long history of offering excellent quality pension schemes to their employees. The relatively small number who never previously did so, have been caught up by a relatively new legal duty to enrol employees into a pension scheme and contribute to it on their behalf.

This policy is known as “automatic enrolment” and it is a form of soft compulsion – employers have to enrol their employees in a scheme but the employees are free to opt out of it if they want to. In total, over one million new employers have enrolled their staff in a workplace pension since automatic enrolment was introduced.

Initial levels of workers opting out of their employers’ pension scheme have been low. Once automatically enrolled in a pension scheme, most employees seem happy to remain.

However, initial levels of contributions under automatic enrolment were minimal and they will increase from this month and this will make staying in a pension scheme more of a challenge.

Minimum levels of member contributions will increase further in April 2019 (see table below).

 

Initially

From April 2018

From April 2019

Minimum member contribution

1%

3%

5%

Minimum total contribution

2%

5%

8%

Any increase in member contributions will cause some pension scheme members to consider whether they can afford to remain in the scheme. For some people the priority is dealing with living costs or paying off debts and saving for retirement (or anything else) is a luxury they cannot currently afford. But, for those who are able to do so, there are very good reasons to pay any increase in member contributions (these reasons also apply to anyone considering whether to join an occupational pension scheme or not):

1. The state pension is not enough to live on. From April 2018 a full state pension will be worth £164.35 per week. If you want to have a more comfortable retirement you have to save into a private pension.

2. State Pension Age is very far away. A recent change by the government could mean that State Pension Age is as high as 70 for anyone aged 30 or younger (sign Prospect’s petition if you want to help reverse this change). If you want to be able to retire before then, you have to have a private pension to fall back on.

3. Your employer contributes on your behalf. Under automatic enrolment your employer is required to contribute to your pension scheme. When minimum member contributions increase, minimum employer contributions go up too. If you do not join the scheme and pay the minimum contributions you are effectively giving this money back to your employer.

4. You get tax relief. Pension contributions attract tax relief, so the actual cost of the member contribution rate is at least 20% cheaper than it appears (40% if and when you become a higher rate taxpayer).

5. The sooner you start the easier it is. The earlier you start contributing the longer your money will be invested and the higher the returns will be.

A recent BBC report about increasing contributions under automatic enrolment suggested that paying the increases could make the difference between having a company pension of £18,000 per year rather than £1,000 per year to fall back on (on top of the state pension).  

Automatic enrolment has resulted in over a million employers contributing to a pension on behalf of many millions of employees for the first time. The coming increases in contribution levels will help ensure that the millions of employees in these schemes have a chance of building up a meaningful level of pension.   

However, the brutal truth is that the minimum contribution levels under automatic enrolment are still not enough. If your employer is only contributing at the minimum level required by the law then it is important to speak to your local Prospect rep about what can be done collectively to improve that. Numerous employers that Prospect deals with pay over 10% into pension schemes on behalf of their employees and the no reason we cannot aim for at least this level for all Prospect members.

 

Neil Walsh

Neil Walsh


Comments

  • Fantastic advice as always from Neil.

    i recently talked with a friend who didn't realise she could take her teacher's pension (from 60 for her) now that she's got a different job.

    She's nearly 63 - that's 3 years pension she's lost forever!

    If you understand your pension(s) then you understand your options!

     

    Ian Andrew Beddow

    03 April 2018 19:53


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