If you have been automatically enrolled into a work pension then you will probably see a little more of your monthly pay squirrelled away after April 6.
That’s because the level of saving required by auto-enrolment is rising. It will mean your pension pot builds up more quickly, but may also mean your take-home salary is lower.
That might tempt you to stop those higher contributions - as is your right - but there are many reasons why you should resist the urge.
What exactly is happening?
Auto-enrolment began in 2012 and since then more workers at more employers have gradually been included in the scheme. The amounts that members are required to pay in, as well as the amount their employer has to pay in, has also been rising.
Under the scheme’s rules, contributions are worked out as a percentage of an ‘earnings band’, which this year (2018/19) meant earnings between £6,032 and £46,350.
Of the money earned between these two levels, 3% was contributed by individuals to a pension. A further amount worth 2% was 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 £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.
What difference will it make?
The effect of the changes depends completely on your personal circumstances, but an example may be useful.
Someone earning £30,000 in the 2018/19 tax year 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, comprised of £99.43 from them and £59.66 from their employer.
It’s important to remember, however, that the difference to their take-home pay is likely to be lower because the contribution rates are based on money earned before tax.
Why you should stay in - and increase your contributions if you can
Building a pension fund to give you an adequate retirement income is likely to take contributions that are higher than the levels required under auto-enrolment. Even at the higher levels beginning in April the pot you build is unlikely to provide an income in retirement that enables you to maintain your 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.
To help you work out how much you need to pay in, Fidelity has developed retirement savings guidelines to provide a set of simple ‘rules of thumb’ to show you whether you’re on track.
Via some simple online tools, you enter details such as your age, the age you believe you will retire, the income of your household (rather than simply what you earn alone) and the amount you have saved up to now.
The tools will then factor in details like the state pension to establish how much retirement income you’ll need on top to maintain your lifestyle.
The results are presented in three ways: a figure showing how many times your household income you will need saved in order to retire; a percentage of your household’s income that you need to be saving now to get there; the rate at which you can safely drawdown on your savings in retirement so that savings pot will last 25 years or more.
Within the calculations are many assumptions about investment returns and your circumstances in retirement. The assumptions are based on historical returns and common scenarios - for example that your household will go on to receive two state pensions in retirement.
Have a go for yourself and, if you’re still some way off your targets, don’t be disheartened. It’s never too late to make changes that can improve your retirement income, and even small changes can make a big difference given time.
If you want encouragement, another Fidelity tool demonstrates the power of increasing your pension saving by small amounts. It shows what a difference contributing just an extra 1% of your salary now will make to your retirement fund.
The Government’s Pension Wise service offers free, impartial guidance to help you understand your options at retirement. You can access the guidance online at www.pensionwise.gov.uk or over the telephone on 0800 138 3944.
Fidelity’s Retirement Service also has a team of specialists who can provide you with free guidance to help you with your decisions. They can also provide advice and help you select products though this will have a charge.
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.