April 2019 sees the latest hike in minimum pension contributions. From this date, the minimum contribution rises from 5% to 8% of salary. Analysts are clearly worried about affordability both for employees and employers. However, the attached article shows that the last jump in contributions only saw an increase in opt outs of just 0.2%. So whilst the increase will reduce take home pay for employees, it may not lead to them leaving pension saving. Employers are advised to communicate the increase carefully and, where possible, provide illustrations that demonstrate what impact this change will have on take home salary. If you need some help with this, contact us today and we can provide template letters.
Let’s take a few minutes to recap on how we reached this point.
What's happened to date?
The Pensions Act 2008 brought a new obligation on all employers. For the first time all employers would legally have to provide a pension scheme for all eligible employees. This became known as Pension Automatic Enrolment. Over the subsequent ten years we have seen a staged roll out of Automatic Enrolment to the point where now all employers, from the largest to the smallest, are covered by the legislation.
Mindful of the burden that this would create for employers, the original bar was set pretty low – a total of 3% contributions to be made into a qualifying scheme (1% from the employee, 1% from the employer and 1% in tax relief). This amount was quickly decried as nowhere near enough by the pensions industry and it was never intended to be the end point for the legislation.
What happened next?
From April 2018, the next stage has been launched in the form of the first increase in the contribution scale from 3% to 5% (2% from the employer and 3% from the employee inclusive of tax relief). But lurking in the background is also a further increase scheduled for April 2019. At this point the contributions increase again to 8% (3% from the employer and 5% from the employee, again inclusive of tax relief).
Why is this being done?
Well to be blunt, pensions are expensive. We are, on average, living longer and the pot of money you have at retirement has to stretch a lot more than it used to. Pension funds are therefore hungry beasts and need filling if you want to have a decent standard of living at retirement. This BBC article demonstrates the difference between the old 3% contributions and the eventual 8% contributions. Whilst the article deliberately looks at extremes in the potential payouts, it does highlight the importance of compound interest – starting to save early in your career is more effective than waiting until you are near retirement. But, as with everything else, it comes down to affordability.
What if I can’t afford to pay 8%?
As an employee, you do have options. You can opt out of the pension arrangement but you need to do this in full understanding of the potential income you will have at retirement. You can also opt-down so instead of paying 3% you could pay 1% or 2% but be aware, if you do this, your company has no obligation to make any payments into your pension fund.
As an employer, you should look to ensure that your pension fund takes advantage of salary sacrifice arrangements. This way you can reduce the amount of National Insurance you pay on ‘sacrificed income’. You can not, however, induce or exhort your employees to opt out.
How can I get help?
Contact Cornerstone Resources and we can help you navigate the Pensions Automatic Enrolment minefield.
Who are Cornerstone Resources?
Cornerstone Resources are experienced HR professionals who can help you get the best from your employee benefits spend. Contact Rob on 07494 161169 or Nicci on 07908 875146 for more information. Alternatively click here for our full range of services.