Pensions automatic enrolment
Pensions. Not exactly a topic that tends to excite most of us. But it is important nevertheless! Faced with a crisis in long term savings, the UK Government moved to make it mandatory for employers to have a pension scheme. Starting in 2012 with the largest employers, all employees were to be automatically enrolled into a qualifying pension scheme. Initially the contributions were small, only 3% of salary between 2012 and 2018. However, this was only ever intended to be the start of the pensions automatic enrolment journey. The attached article says that in order to retire on a pension of £20,000 at age 65, the average 25 year old needs to save £235 a month. With the average salary being £497 a week, it is going to take a lot more than 3% to save towards a decent pension.
Changes to pension automatic enrolment contributions
April 2018 saw a further increase to 5% total contributions. Then in April 2019 saw the figure rise to 8% (9% with tax relief). When the Pensions automatic enrolment legislation was first introduced, these increases were met with a mixed response. Whilst pensions experts welcomed the increases, they were concerned that employees would feel that this would be enough to guarantee them a decent retirement. In reality, the total contribution required needs to be over 12%.
Opt out rates
Interestingly, the number of employees opting out has actually declined over recent years from 8% in 2017 to 7% in 2018. So the increase in contributions has not led to employees choosing to cease pension contributions. This is largely due to the inertia effect. Once people are automatically enrolled, they aren’t very likely to opt out. This pattern is further supported by the requirement to re-enrol all opted out employees every 3 years. Although data isn’t yet available to determine whether there has been any increase in opt outs since the latest increase occurred in April 2019, it does not seem likely.
Pensions automatic enrolment - what's next?
There’s no immediate plans to increase contributions further but I would not be surprised if further contribution rate increases do not follow. Quite simply, even the current rates aren’t enough to provide for a secure income.
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