Today marks the next stage in boosting the retirement prospects of workers across the nation.
Millions of people who have been automatically enrolled into a workplace pension will see their contributions triple from today, as the government attempts to persuade the population to save more for retirement.
Workers who have been ‘auto-enrolled’ into their employer’s pension plan have only been required to pay a minimum contribution of 1% of their qualifying earnings, with their employer paying the same amount. However, individuals must now pay a minimum of 3% (2.4% plus basic rate tax relief), while employers must contribute at least 2%. This takes the overall minimum contribution rate to 5%.
Automatic enrolment has been highly successful in helping to get more people saving: more than three quarters of workers are now contributing to a workplace pension, up from 55% in 2012, before the policy kicked in.1
However, the small initial contributions have had very little impact on employees’ take-home pay. With the minimum employee contribution rising to 3%, the worry is that workers could start to opt out as they see more of their pay packet going towards their pension.
Those opting out would not only lose the valuable employer contribution, but also the tax relief. Figures suggest the decision could make the difference between receiving more than £18,000 a year in retirement, or as little as £1,000, on top of the State Pension.2
Nevertheless, even those who remain opted in may not be able to build up an adequate pension. By 2019 the overall minimum contribution rate will rise to 8%, but that is still far below the required level for a decent retirement for most people.
“Minimum contributions are still relatively modest and nowhere near enough to ensure a comfortable retirement, so most people should actually look at paying more than the minimum if they can," says Ian Price, divisional director at St. James’s Place.
“There are also vast swathes of the population, such as the self-employed, who are locked out of auto-enrolment. These groups will benefit from early and ongoing financial planning and guidance,” he says.
More than nine million people have been automatically enrolled into a workplace pension, many of them women saving for the first time. It is estimated that 3.6 million women are newly saving, or saving more, as a result of the legislation.3
“Thanks to automatic enrolment, future generations of women will enjoy the same retirement provision as men and will have the opportunity to reap the benefits of a good private income,” says Guy Opperman, Parliamentary Under Secretary of State for Pensions and Financial Inclusion.
“This will significantly improve incentives for many of the 632,000 women with multiple jobs, such as mothers fitting work around childcare, and people with caring responsibilities.”
Nevertheless, despite the progress in recent years, women still lag behind men when it comes to saving for retirement.
“On average, women will still end up with much smaller pensions than men. This is because they still earn less on average, they are more likely to work for firms who are contributing at the legal minimum, and they are more likely to spend periods out of paid work with caring responsibilities when little or nothing is going into their pensions,” says former pensions minister Steve Webb.
“Much more needs to be done to put women on a level playing field when it comes to workplace pensions,” he adds.
Considering women will likely take career breaks for childcare, and the fact that life expectancy for women is now 834, means they arguably have the most to gain from financial advice.
Significantly, data shows that women with access to professional financial advice have a significantly bigger pot size of around £125,000 compared to those earning a similar salary and who are unadvised.5
The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.
The level and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.
1 Department for Work and Pensions, Automatic Enrolment Review 2017: Analytical Report, December 2017
2 www.bbc.co.uk, 19 March 2018
3 Department for Work and Pensions, Automatic Enrolment Review 2017: Maintaining the Momentum, December 2017
4 National Life Tables, Office for National Statistics, September 2017
5 Data from Pension Monster, January 2018