As another tax year passes, the 10 million people who have been automatically enrolled into their company pension will see a little more put aside each month for their retirement.
That’s because the 6 April marks the date of a scheduled rise in minimum contributions for auto-enrolment schemes. Under the rules, contributions are worked out as a percentage of an ‘earnings band’, which for (2018/19) meant earnings between £6,032 and £46,350.
During 2018/19, 3% of the money earned between these two levels has been contributed by individuals to a pension while a further 2% has been paid in by the employer, taking the total to 5% of earnings within the band.
After April 6, both the earnings band and the contribution rates are changing. The earnings band will change to between £6,136 - £50,000, while the contribution rates will rise to a total of 8% - of which 5% is paid by the individual and 3% by their employer.
It means that employees will see a little more taken from their pay. That may not sound like great news, but when you look underneath to see the difference it makes to pension savings you can see why this is actually a great deal.
The exact affect for an individual depends on how much they earn, but an example is useful. Someone earning £30,000 in the 2018/19 tax year and contributing the minimum allowed under auto-enrolment will have seen monthly contributions totalling £99.87 paid into an auto-enrolment pension. This would be comprised of a £59.92 contribution from them and a £39.95 from their employer.
Assuming they continue to earn £30,000 in 2019/20, their total monthly contribution will rise to £159.09 following changes arriving this month.
That is made up of £99.43 from them and £59.66 from their employer. That’s any extra £59.22 into their pension in return for giving up £39.51 of their gross monthly salary. But the difference to their take-home pay is lower - about £21 a month - because contributions benefit from tax relief.
So that’s £21 a month cost for an extra £59.22 into a pension. That money can then grow tax-free - potentially for decades - until it is ready to use to fund retirement.
That’s the good news. Less good is the fact that a person saving at the minimum auto-enrolment levels is unlikely to build a pension pot that can provide an income in retirement that enables them to maintain their lifestyle.
To do that you will have to pay in more - either into your work scheme or into a Self-Invested Personal Pension (SIPP) that you establish for yourself. If you do that, your contributions still get a boost from tax relief, so the impact on your take-home pay may be less than you think.
If you need some encouragement, our retirement saving pages lay out exactly how much difference it could make to your retirement. There’s separate guides for different age groups.
For those in their 20s and 30s, they explain how to take advantage of the many years still available to save and build investment returns.
Our guide for those in their 40s helps you to work out the level of retirement income you are on track to receive, and explains how you can build up even more.
For those in their 50s, our guide helps you get ready for retirement by identifying the best way for you to take your pension cash - as well as give your pot one final boost.
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The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Withdrawals from a pension product will not be possible until you reach age 55. Tax treatment depends on individual circumstances and all tax rules may change in the future. You should regularly reassess the suitability of your investments to ensure they continue to meet your attitude to risk and investment goals. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.