The minimum level of contributions into auto-enrolment pension schemes will increase from the 6th April 2019, with both employers and employees obliged to make increased contributions.
Auto-Enrolment Pension Schemes: Increased Contributions
Currently, employers have to pay a 2% contribution into auto-enrolment pension schemes, whilst employees have to pay 3%. However, from the 6th April 2019, the rates will increase to 3% for employers and 5% for employees. This is designed to ensure that a total minimum contribution of 8% is paid into auto-enrolment pension schemes each year. Up to the 5th April 2018, the total minimum contribution was just 2%, with both employer and the employee contributing a minimum of just 1% each. Accordingly, the increase which will take place on the 6th April 2019, will represent a quadrupling of the total minimum contributions in just 2 years.
These rates relate to those auto-enrolment pension schemes based upon “qualifying earnings,” which in 2018/19 are currently between £6,032.00 and £46,350.00 per annum. The rates are different for those schemes that use a different definition of earnings. For instance, those based upon gross earnings that exclude bonuses and commissions, overtime, etc, currently have minimum contributions of 3% from the employer, and 3% from the employee. On the 6th April 2019, these rates will increase to 4% for the employer, and 5% for the employee, thereby producing a total minimum contribution of 9%.
Young Savers remain Pessimistic About Retirement Prospects
Despite auto-enrolment and the increasing levels of contributions, a recent study by BlackRock (the ‘DC Pulse Survey‘) found that just 39% of 25-34 year olds are confident that their retirement savings, as currently envisaged, will be sufficient.
In response to the survey, the head of UK DC at BlackRock, Claire Felgate, stated that whilst increasing the total minimum contribution to 8% for auto-enrolment pension schemes in April 2019 was the right thing to do, “our concern is that individuals will think the number is ‘enough’. We need to start thinking of 15 per cent as the ‘rule of thumb’ to help everyone secure a comfortable living in their old age.”
The survey also found that 44% of 25-34 years olds deferred saving for their retirement on the basis that it “seems silly to focus on something so far away.” However, firms like Aviva recommend that workers start saving for their retirement at least 40 years before their retirement and contribute at least 12.5% into their pension, which consists of their own contributions, their employers contributions, plus tax relief. This is significantly above the total minimum contribution planned for auto-enrolment pension schemes from April 2019 onwards, and indeed Aviva recommend that the total minimum contribution should rise to 12.5%.