Pension contribution increases: What does it mean for me?
What's in this guide?
Under the changes, the minimum contribution made by employees rises from 3% to 5% and employers’ contributions also rise from 2% to 3%.
This table shows the changes for employers and employees:
|Employer minimum contribution||Employee contribution||Total minimum contribution|
|Before 6 April 2019||2%||3%||5%|
Who does this apply to?
The change affects any employee already on an automatic enrolment pension scheme with their employer in the UK.
What does this mean for me?
Unless you opt out, you’ll be paying more into your pension, and your take-home income will be reduced. If you’re happy to see 5% of your salary go into your pension (plus a 3% contribution from your employer), you don’t need to do anything. When you come to retire, it should leave your pension pot looking a lot healthier.
If you don’t want your contribution to increase, you can opt out, or pay at the old rate, but it’s worth knowing the implications.
We’ve set out the options and implications below, and we’ve included tables which help explain the impact on your pay packet on a weekly, monthly and yearly basis. This should help you decide the best course of action for you.
Do I have to do anything?
If you’re happy with the changes you don’t have to do anything. Everyone affected has three options:
- Do nothing and continue paying in at the new, higher rate.
- Opt out of the pension completely.
- Opt to continue paying in at the old rate of 3%.
The last option is called “opting down”. Choosing this option will mean your employer is no longer obliged to make any contribution at all.
Should I opt out?
If you’re thinking of opting out of your workplace pension scheme, think twice!
Opting out is like taking a voluntary pay cut. You’ll miss out on tax relief, as well as your employer’s contributions.
If you think you’ll struggle to handle the reduction in your take-home pay, you may:
- Be entitled to tax credits or an increase in the amount of tax credits you get (although you may not get this until the next tax year).
- Be entitled to an income-related benefit or an increase in the amount of benefit you get.
- Be able to reduce the amount of student loan repayments you need to make.
What will the changes mean for my pension?
Take a look at this chart below. It shows the huge difference between staying in and opting out. The figures are based on the UK’s average salary of £29,669. We’ve included a table at the end of the page which has the numbers in more detail, across a wider range of salaries.
Why are contributions going up anyway?
Auto-enrolment pensions began with modest contributions: 1% from the employee, including tax relief, and 1% from the employer.
These then rose in April 2018, from 1% to 3% for employees, and from 1% to 2% for employers.
For everyone to be able to afford a decent retirement, the government has always said that rates need to rise, which is the reason for the 2019 change.
How much more you’ll pay
How much more you will have in your pension
The difference between opting out and staying in
You can work out your specific contributions using the Money Advice Service’s handy contributions calculator. You can also see how much your employer will pay in using the UK government’s employer contribution calculator.
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