Prepare yourselves for a slightly lighter pay packet this month: Your workplace pension contributions are increasing.
With the start of the new tax year on 6th April 2018, your contributions will more than double from 1% to 3%. That rise is expected to affect millions of employees across the country – so you’ll want to start planning accordingly.
Choices, Contributions, Opt Outs and Opt Downs
The workplace pension scheme came into force last year, and sees the government and employers match the contributions of employees. It’s easy to see why such a scheme was brought in in the first place – we’re saving less and less each year, and with the government facing a pensions blackhole, steps were needed.
Of course, you can opt out of contributing. However, that’s not advisable unless you have your own pension pot – and a reliable income with which to fill it. With the new increase, you will now have three choices available to them…
- Continue contributing at the new higher rate
- Opt out of your workplace pension
- Continue paying the original rate of 1% – although it’s worth pointing out that when ‘opting down’ in this fashion, your employer won’t have to continue contributing to your pension.
‘A Harsh Jolt’
Rebecca Goldring, tax manager at Blick Rothenburg, reckons that the increase will ‘feel like a harsh jolt’ to millions, saying:
‘The Bank of England forecasts wage growth this year and with a rise in the income tax threshold this should boost spending and put more cash in workers’ pockets. However, the increase in monthly auto-enrolment pension contributions may result in a decrease in take-home pay for some workers.’
‘Those who do decide to opt out will however unfortunately forfeit the employer contributions, tax relief from the Government and any increase in the value of their pension that could be built up through investment growth over their working life.’
On the other hand, Hargreaves Lansdown’s senior pension analyst, Nathan Long believes that workers will be accepting of the change in contributions. He said;
‘Workers can now look forward to retirement with more confidence. Without this jump in contributions, retirement would be unaffordable for many, and an entire lifetime spent working could become the reality.’
How Much Will You Pay?
So, what will the increase look like to you (and your pay packet?).
If you’re earning £20,000, then your previous annual contributions stood at £113; that now rises to £538 each year. For those earning £45,000, you’ll now see an annual increase from £313 to £958. In other words, you’ll likely start feeling the pinch unless you budget for the rise now.
It may sound a lot, but for the peace of mind that comes from knowing that, in your retirement, you’ll be financially secure, is likely to be of much greater value than the short-term loss of earnings. Until then, prepare for the increases by looking over your budget and planning for a potentially tighter few months.