As we enter the 2019/20 tax year there is welcome news for the majority of adult workers, who will automatically save more of their hard-earned cash to provide a decent standard of living when they retire.
Changes to pension auto enrolment rules mean that employers are required to make a bigger contribution to private pensions for workers aged 22 or over who earn at least £10,000 a year from their job. For employees it’s tantamount to getting a ‘pay rise’ although, of course, they cannot access this money until retirement.
Employers and employees pay in more
From April 6, employers will pay 3% of an employee’s salary – up from 2% – into pension schemes that qualify under auto enrolment. So for every £10,000 of their salary, employees will see an extra £100 a year go into their pension pot.
However, the rule change also means that workers will pay more. The employee contribution rises from 3% to 5% of salary, as the minimum total contribution from both employer and employee equates to 8%.
Don’t opt out
It’s only natural to want to keep hold of our disposable income and some workers, put off by the increase, may be tempted to opt out of pension saving. The advice is to resist doing so unless you’re already struggling financially.
Industry experts agree that the state pension is unlikely to provide people with enough money to live on, so it is in an employee’s best interests to stick with it. Anyone who is worried that they can’t afford to pay in a bigger percentage of their salary should check to see if their pension scheme rules make provision for them to make a smaller contribution until their circumstances change.
Of course, some businesses contribute significantly more to employee pensions than the statutory minimum. For example, if an employer already pays in 6% of salary, the employee will only have to pay in 2% to reach the 8% total. In this instance, staff would see no change.
Pay less for more
Workers who are thinking about opting out or contributing less should bear in mind that money saved towards a pension comes out of their pre-tax salary. At the minimum level, based on employee and employer contributions of 5% and 3% respectively, a basic rate taxpayer choosing to pay in £100 to their pension pot will see only £80 deducted from their take-home pay in return for an overall pension contribution of £160, including the employer contribution.
At Howards we specialise in helping companies to set up and manage pension schemes so that they are hassle free. For more information call us 01785 243276.