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Govt should not rush through auto-enrolment hikes

The government should not introduce any sudden hikes to auto-enrolment contributions as this could make savers uncomfortable.

In a note published today investment manager Hargreaves Lansdown says auto-enrolment is entering an important stage as contributions rise next month.

In April contributions will step up from 5 to 8 per cent with experts waiting to see what the effect on opt out rates will be.

Hargreaves Lansdown has looked at the impact on people’s pay now and pensions in the future.

The new rules will mean the average employee pays £905 per year into a pension, but with contributions from tax relief and their employer, the amount added to their pension is £1,810.

The change could boost the pension pot of someone at retirement by half, around an extra £55,000 for someone on average earnings.

But Hargreaves Lansdown also warns lawmakers need to be careful as the average worker will see an extra £30 leave their pay packet in April to cover the cost of pension contributions.

It points out this is the amount the average household spends on eggs, milk, cheese and chocolate.

Hargreaves Lansdown senior analyst Nathan Long says: “Auto-enrolment has revolutionised retirement saving in the UK, with our pay packets absorbing all that’s been thrown at them so far.

“April’s contribution hike is yet another hurdle to clear before we can be confident we’re in better retirement health, with the average worker preparing for their spending power to drop £30 every month.

“Lower take home pay could put pressure on families, although these higher contributions have the potential to power up your pension by half, so persevering remains pertinent. The scheduled jump in the personal tax free allowance will also help offset some of this cost.”

He adds: “Only relying on inertia to provide for us in retirement is dangerous. Auto-enrolment is a little like a cheap balloon at a kid’s party. The more you inflate, the better it gets, but at some point it cannot take anymore.

“The focus now needs to switch to getting people to understand how paying in more personally or improving their investment returns may boost their income or allow early retirement, rather than forcing them to pay more in automatically.”

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Comments

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  1. Personally my primary beef with auto enrolment, is the rubbish default investment options, with rubbish other choices and charges that are far higher overall than many personal pensions. Quite how and why this is the case I cannot imagine, beyond some people/organisations relying on total absence of choice and inability of individuals to have their contributions directed towards something they want.

    I know my personal investment philosophy is rather different from most, the fact that I now need to pay a lot more in contributions, whilst the value of the employer contribution in % terms drops significantly, coupled with a lack of performance (compared to what I can get elsewhere), makes the employer contribution almost worthless.

    However if I want the employer contribution, I have zero choice…

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