Contributions rise for auto-enrolment pensions

Employers and employees have both been hit since 6 April with a large rise in contribution rates for automatic enrolment pension schemes.

The employer’s minimum contribution has gone up from 2% to 3% of band earnings and the total payment into the scheme is now 8%, up from 5%. So if the employer pays no more than the minimum, the employee will have to put in 5% – previously 3%.

The large rise in the upper earnings limit this year (from £46,350 to £50,000) has added to the burden for higher earners and their employers. For an employee earning £50,000 or more, the employer’s minimum payment has risen from £806 in 2018/19 to £1,316, and the employee’s contribution from £1,210 to £2,193.

The increase will have a noticeable effect on employees’ take-home pay. Employers should make sure their workforce understand the deduction and the importance of saving for their retirement, especially as the age at which they will receive the state pension is rising.

Employers who wish to avoid the disincentive effect of reduced take-home pay could contribute more than the minimum. For example, if an employer pays 5% rather than 3%, employees could continue to pay the 3% deducted in 2018/19, as long as the total contribution still comes to 8%.

The auto-enrolment contribution percentages are the same regardless of age. However, the amounts people need to contribute to achieve the level of income they want in retirement will vary. For example, a 25-year-old need only save about half as much as a 35-year-old to end up with the same retirement fund at 65.

Employees who only make the minimum auto-enrolment pension contributions may find that their retirement fund does not meet their needs – and the older they are, the larger the shortfall is likely to be.