Changes to the auto-enrolment pension scheme, set to come into effect in April, are posed to have a ‘significant’ impact on your pay.
If you are aged over 22, or earning a minimum of £10,000 from a single job, you are enrolled automatically.
MoneySavingExpert say auto-enrolment ‘is an opportunity to boost your pension savings through your pay packet; with the added bonus of your employer and the Government making contributions.’
From April, your employer will be increasing their contributions to a minimum of 3 per cent. However, the overall minimum contribution is increasing to 8 per cent; meaning some employees will have to make up the extra 5 per cent if your employer does not.
The Chronicle reports , so is this ‘a hidden pay rise or a shock pay cut?’
What is auto-enrolment?
The Government scheme began in 2012, and sets employee pension contributions as the default; you have to actively opt-out of the scheme.
Pension increases were introduced on April 6 2018, but there are two new changes being introduced this April:
- The minimum employer contribution will increase from 2 per cent of your salary to 3 per cent.
- The minimum total auto-enrollment contribution will increase to 8 per cent; the combined total of contributions from you and your employee.
What does this mean?
If your employer is only putting in the minimum 3 per cent, your contribution will automatically rise to 5 per cent to meet the total. This would be as much as £200 per £10,000 increase, without you doing anything.
However, if your employer is putting more than the minimum contribution in, for example 4 per cent, then your contribution will only rise to meet the total of 8 per cent.
It is worth noting, that your contribution is made from your gross income; so pre-tax.
This means that it actually costs less than it sounds.
What Martin Lewis has said
Money Saving Expert Martin Lewis, in a post on his site, wrote: “On April 6 2019, most UK workers aged 22 or over are due a hidden pay rise; but your employer needn’t tell you.
‘The effect is a bit of a mind twist.
‘In effect, everyone who is opted in effectively gets a pay rise, as your employer is giving you even more money you wouldn’t have otherwise got, even though it’s not immediately usable.’
However, he added: ‘Everyone who is opted in gets less take-home pay. To get the extra money, in most cases you’ll have to contribute more now too; so your disposable income, the amount you can spend each month, is reduced.’
‘Don’t opt-out unless it is a last resort, because that means in effect you’re giving up extra money from your employer.’
Martin Lewis reveals that you can opt-out of auto-enrollment, but to consider it carefully as ‘generally, you’re sacrificing long-term cash for short-term gain.’
He advises if you have expensive debts, like payday loans, you may consider paying them off first before enrolling once more.
In addition, if you already have a large pension, ‘there is a risk auto-enrollment will put you over the lifetime allowance.’
To opt-out, you will need to go through your employer and pension advisor.
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