Auto-enrolment increase effect on take-home pay revealed

An increase in auto-enrolment contribution levels could knock hundreds of pounds of workers’ take-home pay, according to a new analysis.

The BBC asked Hargreaves Lansdown to estimate the effect of the increase in auto-enrolment from 3 per cent to 5 per cent of salary from April will have on workers across the spectrum.

With the personal allowance due to increase from April as well, the analysis reveals the higher auto-enrolment contribution levels will have a relatively modest impact on pay packets.

For workers earning £15,000, annual take-home pay will typically be £49 lower, rising to £253 lower for someone on £30,000.

However, the pensions industry is still urging the market to keep a close watch to see if any cuts to take-home pay will lead people to opt out of their pension contributions.

More on auto-enrolment from Money Marketing

Hargreaves Lansdown head of policy Tom McPhail says: “This is quite a significant increase relative to what they’ve been paying to date.

“This is going to affect up to 10 million people who’ve been auto-enrolled in the past few years, so the potential impact of this change is quite substantial.”

The opt out rate remained under 1 per cent even when contribution levels first rose last April.

From the mid 2020s, the government plans for every pound of earnings from the first pound to count towards auto-enrolment.

Currently earnings between £6,032 and £46,350 are used to calculate contributions.

 A DWP spokesman said: “Automatic enrolment has been an extraordinary success, transforming pension saving and improving the retirement prospects of more than 10 million people already.

“That saving habit is sticking – the first increase in minimum contributions last year did not prompt people to stop saving, and employers are hugely supportive of our phased approach to ensuring workers are saving enough for security in later life. We’ll continue to closely monitor the response to the latest increase to inform future policy.”

Pensions industry leaders have urged consumers to look at the impact on take home home pay in the xontext of how much extra they will get in pensions once they retire.

Aegon head of pensions Kate Smith says: “While the analysis shows how much take-home pay will reduce by as a result of the increase in employee auto-enrolment minimum contributions, it’s at least as important to highlight the increase this means for contributions going into your pension, not only from the employee, but also from the employer an government. Pensions are part of people’s pay packet.

“For someone earning £15k, the reduction in take home pay results in an extra £261 contributed to their pension each year a significant amount of which comes from the employer. We hope that people will take a long term view on their pension contributions as opting out is likely to make saving for retirement later much harder by reducing the length of time pension contributions can benefit from investment returns. Putting off pension saving could turn out to be harmful in the long term. ”

Source: Aegon

Hurley Partners pension director Martin Tilley posted on LinkedIn that an analysis should be shown of how much your income in retirement will increase for the reduction in take home pay in the 25 or so years up until retirement.

Wealth at Work director Jonathan Watts-Lay says that rates may have to go further still to ensure adequate retirement income.

He says: “Whilst auto-enrolment has been a great success in getting people to save into pensions, if the member gets used to an 8 per cent contribution rate they may believe this is the ‘right’ amount and not consider paying more.

“Often employers will match to higher levels, yet their default contribution is in line with auto-enrolment requirements and members will and do miss out. Our experience is that there are many schemes where employees could take advantage of more ‘free money’ but don’t understand the benefits on offer.”

He adds: “Financial education in the workplace is essential in helping employees realise how valuable workplace pensions are and how to make the most of them. We work with employees in many organisations to show them this as well as how they could free up money to ensure pensions are affordable. It is not unusual for hundreds of pounds per year to be freed up by shopping around for everything from car insurance and utility providers to using discount vouchers to save on the weekly shop.”

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Comments

There are 3 comments at the moment, we would love to hear your opinion too.

  1. AS ever this research lacks rigour. From the sample, what percentage have had a rise of any significance over the last 12 months?

    If the answer is not many, then the majority will probably resent losing any amount as they are already hard pressed and were hoping for some increase after April with the higher allowance.

    What should be looked at is for the lower earners how much more would they have had in take home pay with this higher allowance. To this figure add the deduction due to higher AE and you have perhaps a truer figure of what they have lost. Particularly those whom you quote on £15k p.a – every penny counts.

  2. PS. Yet again we seem to have spin to justify what the providers and Government want – not what the public would like.

  3. From today’s Times:

    “Household finances have deteriorated at sharpest rate since last March”.

    How does that gel with this ‘research’?

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