All employers are required to provide a workplace pension and all employees are enrolled on it unless they choose to opt-out.
Another aspect of 'auto-enrolment' is that it sets out the minimum amount that must be paid into your pension.
As part of the scheme, it was always planned for these minimums to gradually increase. Now auto-enrolment is fully rolled out, the increases can begin.
Pension contributions will more than double
At present, there is a total minimum contribution to workplace pensions of 2% of your annual salary. This is made up of a 1% minimum that your boss must pay in and then you make up the other 1%.
You can, and should, pay more in but that is the bare minimum the law demands that you put in. Equally, many employers pay in more than the legal minimum.
If your employer pays in more than they have to, and takes the total contribution over the minimum 2%, then you don’t have to pay in anything at all.
From 6 April the total minimum contribution will rise to 5%, with your employer having to contribute at least 2%. This means if your employer only pays in the bare minimum the amount you’ll have to pay out of your salary will jump from 1% to 3%.
You may not need to pay in 3% of your annual salary though as you only have to make up any shortfall in the total minimum contribution left by your employer.
So, if your employer pays in 4%, then you would only have to pay in 1%, but if your boss sticks to their minimum of 2% then you have to pay in 3%.
However, you don’t actually have to pay 3% out of your salary.
That is the total amount that has to be contributed to your pension, which means it includes tax relief at 20% of whatever is paid in. That means at present you only have to make a minimum contribution of 0.8%, but that could rise to 2.4%.
For someone earning the average salary of £27,000 that means your annual pension contributions could jump from £169 to £517.
So, start asking your employer now how much they will be paying into your pension after the rule change so you can know how much of your salary will be going into your pension after 6 April.
Is that the last rise?
No. Minimum contributions will rise again next year up to a total of 8%, with your employer having to contribute at least 3% of that.
As you can see, with each increase there is a greater burden on the employee to pay into their own pension as the employer percentage doesn’t rise in line with the total percentage.
What will it mean for my take home salary?
If someone earning £27,000 had an employer who only stuck to making the minimum contribution they would see their own pension contributions jump from £169 a year now to £1,080 from April 2019.
You may be marginally worse off from next month – it amounts to an extra £29 a month for someone earning £27,000 – but the rise should mean your retirement isn’t quite as bleak as it may have otherwise been.
The whole point of auto-enrolment is to try and get everyone saving for their retirement. If you don’t have a pension you’ll be reliant on your savings and the State Pension when you give up work. That is not enough.
The more you save into a workplace pension the more you’ll have to live off in retirement. Indeed, even saving at the increased rate of 5% will likely mean you won't have enough set aside when it comes time to pack it in.
One general rule of thumb is that you should be saving half your age as a percentage into your pension.
So, if you’re 20 save 10% of your salary, at 30 put aside 15% etc.