We know what happens when a Beast from the East mixes with moisture rising from the South and a similar concoction is brewing for workplace pensions… Mark Soper explains.

From April this year many workers – particularly those you work for small to medium sized companies — will see their take-home pay falling as a result of a potential tripling in employee pension contributions. Currently, the minimum gross employee contribution is 1.0% of earnings* and from April the minimum increases to 3% of earnings (2.4% of net pay after tax relief). This could cause some cash-flow problems for many workers particularly the low-paid as the hike in contributions comes on the back of increasing inflation, wage stagnancy and increasing mortgage payments and council tax bills.

It is possible for workers to leave or opt-out of the pension plan and in December last year an AVIVA survey found that 1 in 8 workers would consider leaving their workplace pension schemes when the increases begin to take effect. However, in leaving the pension scheme workers will lose the Government’s contribution to their private pension in the form of the loss of tax relief and, critically, they are also likely to lose the benefit of the employer pension contribution which in itself is increasing from a minimum of 1.0% to 2.0% of earnings from April 2018..

The idea of semi compulsory workplace pensions for all is generally a good idea not least because it forces workers to save more towards their retirement with additional contributions being paid in by both the employer and the Government and a total of 5% of earnings going in to a pension pot from April is not a bad start. 

Looking to next year, however, further increases will apply with the heaviest burden again on the employee when the minimum gross contribution for all workers will reach the Government’s ultimate target of 5% of earnings (4% of net pay after tax relief) and the minimum employer contribution will increase to 3% of earnings giving a new minimum total contribution of 8.0% of earnings.

Good employee communication is going to be key to keep workers both engaged and paying into their pension plans – after all if you pay in you will effectively gain ‘’free’ money from both the Government and the employer. From April 2018 and based on gross pensionable pay of £25,000 p.a. the minimum net pension contribution of £50.00 per month turns into a gross invested pension contribution of £104.00 from April 2018 – more than double the worker’s cost – once the Government tax relief and the employer’s contribution has been added,

From April 2019 and based on the same gross pensionable pay of £25,000 p.a. the increased minimum net pension contribution of £83.33 per month turns into a gross invested pension contribution of £166.67– once the Government tax relief and the employer’s contribution has been added.

Whilst the Government’s key driver for the introduction of Workplace Pension schemes has been to get more people saving at least something for their retirement, there is no doubt that a further advantage for many workers will be the ability to withdraw these pension funds entirely or gradually from the age of 55, 25% of which can be withdrawn tax-free  – particularly as the State Pension Age continues to rise.

In summary, headwinds to overcome but with good communication the majority of workers should be engaged with the process of saving for their retirements and stay in their workplace pension schemes.  I strongly believe that online tools such as the RetireEasy LifePlan will play an increasingly important role in educating the workforce about pensions and reinforce the benefits of contributing for the future.

*For this document the definition of earnings is earnings between the lower and upper earnings limits