TAX cuts and wage rises next month look set to help the continuing progress of auto-enrolment into pensions at work.
But employees’ lack of engagement with their pension continues to threaten the scheme’s prospects of long-term success.
This time last year employees earning over £10,000 were paying only 1 per cent of their qualifying earnings into an auto-enrolled pension. Last April that rose to 3% and on April 6 it will jump to 5%, with an employer contribution of 3%.
A worker on £20,000 will have seen their deduction rise five-fold from under £10 to £49 a month, and those on average earnings of £27,000 will be seeing £73 a month disappear, against £14 a year ago and £43 currently.
But come April 6, everyone’s personal tax allowance will rise from £11,850 to £12,500, and for low earners the National Living Wage goes up by 4.9% for over-25s, with above-inflation rises for younger workers, all from April 1.
At the same time workers generally have enjoyed their strongest real rise in pay for two years, with regular wages up 3.4%, or 1.2% after inflation.
That timely boost to pay packets looks set to disguise the higher pension deductions and keep most workers enrolled in their scheme.
In an interim research report the Department for Work and Pensions (DWP) found that few workers were aware that their automatic enrolment contributions would be increasing in 2019, but their reaction to the news tended to be either neutral or positive.
“Some were pleased that the increased rate would help them save more for retirement,” the report says.
“Very rarely, workers expressed some concern about affording the planned increase, but even then they did not suggest it would affect their decision to remain in the scheme.”
That said, while the DWP found that opt-out rates were low after the last hike to contributions, it noted that few people were saving more than the statutory minimum, which is widely seen as being set too low to build up a sufficient pension pot.
“Workers who remained enrolled typically spent little time considering the idea,” the report says. “It was common for workers to describe remaining in the scheme as an easy decision, since they perceived the employer contribution as ‘free money’.
“Although workers often said they wanted to save more for retirement, very few were contributing more than the minimum rate to their pension.”
Financial services firm Royal London said the opt-out rate for automatic enrolment schemes rose by just 0.4% in the quarters before and after last April’s contribution hike.
The pension company’s director of policy Steve Webb said: “For a typical worker who gets an average pay rise, we find that their take-home pay will still go up in April, even allowing for the increased pension contributions. The bigger challenge is likely to be getting those 8% total contributions up to more realistic levels in future.”
The Association of Consulting Actuaries has said that to achieve a decent income in retirement, pension contributions need to rise gradually from 8% to between 12% and 14% of earnings.
However, with figures showing that savings outside of pensions rose by only 0.4% last year, a drop from 3% in 2016 and the weakest rise since data started being collected in 2007, it is not clear that workers have the means to save more into their pension.
Ian Browne, retirement planning expert at Quilter, said: “Auto-enrolment for pension saving has played a substantial role in helping to boost savings, but the policy is in for a challenge this year. If you place the 2% increase in contribution rates into context, it will potentially return a 66% larger pension pot. With that knowledge, people are likely to think a lot more carefully about whether the extra couple of quid in their pocket per month today is really so much to give up.”
He added: “Relying solely on the power of inertia for the continual success of auto-enrolment is the equivalent of burying our heads in the sand. Over the course of the next year the industry and Government need to do more to ensure we are boosting engagement and education.”
Nathan Long, senior analyst at Hargreaves Lansdown, commented: “The best pension schemes in the future will be those where the provider has been able to promote positive retirement planning among members. The tell-tale signs of how well the company pension provider resonates with employees include the number of staff logging into their pension, the proportion who’ve upped the amount they pay in and the number that are taking an active interest in their pension investments.”
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