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What does the pension contribution change mean for me?

‘Automatic enrolment’ into workplace pensions was introduced in 2012 as a revolutionary way of helping people to save more for their retirement without having to lift a finger. So far, it has lived up to expectations and more than 9 million of us have automatically started putting little bits of our salary into a pension scheme each month. The proportion people contributed to their pension, if their employer puts in the minimum, started low at 1% and has been growing gradually. Tomorrow, on the 6th April, the amount will increase to 5% with tax relief - but what does this actually mean for you? Our Director of Long-Term Savings, Yvonne Braun, takes a closer look:

Don’t panic - It’s still only a small chunk of your monthly pay

Your employer’s contributions are also increasing, so they have to give you at least 3% of your salary on top of your usual pay and add this to your pension. With your 5% - you’re putting an equivalent of 8% of your salary into your savings each month. So if you hear people talking about 8% contributions – remember, only 5% of this is actually paid by you, while your employer is also giving you extra money for your retirement, too.  Also remember that the % contributions do not take into account your first £6,032 of earnings (unless your employer is more generous)  so it’s not as much as it sounds.

It’s taken before you pay tax so it’s even less of a hit than you think

People tend to be most familiar with what their ‘take-home pay’ is, also known as ‘net salary’, as this is what you actually see land in your bank account at the end of each month (or week!). Your pension contributions are taken before you pay income tax – this basically means you’re getting more bang for your buck with a little bit of help from the Government from tax relief. It essentially costs you less to save more for your retirement – if you’re contributing 5% into a pension, this includes tax relief, so most people would actually only be paying 4%.

The more you put in now, the faster your pot will grow without you having to do anything

It can often seem daunting, and sometimes quite futile, to be putting away little bits of money each month that you can’t touch for decades – particularly if you’re just kicking off your career. The fact of the matter is that the earlier you start, the more you’ll have in retirement. Your pension pot is invested, so it benefits from compound growth over the years. This means that the more you have in the pot early on – the bigger it is likely to grow without you having to take any further action.

8% is good but we still think it would be better to put away a little more!

Whilst it’s excellent that the minimum amount going into your pension has increased from 2% to 8% in recent years – it’s widely accepted that most people should be saving more than this if they’re able. If someone on the UK’s average salary saved the minimum amount (5% + 3%) their whole working life, they may still fall short of the recommended amount of savings needed for a comfortable retirement, even with compound growth factored in. So, if you can – speak to your employer about increasing your contributions. You’ll thank yourself for it! But don’t just take our word for it – our friends over in Australia are on track to increase rates to 12% by 2025.

Women are suffering from a pensions gap – so take action now

A recent study by Prospect, the Trade Union, found that women retiring today could expect to receive nearly 40% less than men through their pension income. This pension gap is more than double the size of the gender pay gap – a shocking revelation. Women fall victim to financial imbalances because of the vital role they play more commonly than men in raising children and other care duties – coupled with ongoing pay disparities. Sadly, the pension gap will persist and grow so long as the gender pay gap still exists. It is therefore even more important for women to consider increasing their pension contributions beyond the 8% minimum to help counteract these disadvantages.


Find out more about automatic enrolment here.

Last updated 05/04/2019