Is it worth saving into a workplace pension?

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In a bid to get more people saving for retirement, the government has introduced legislation that makes it compulsory for employers to automatically enrol eligible employees into a compliant workplace pension scheme.

Under this auto-enrolment legislation, the employer has a duty to:

  • Automatically enrol certain workers into a suitable scheme
  • Allow other certain workers to opt-in to a suitable scheme
  • Allow the remaining workers to access a scheme, if they want to. 

In the first two scenarios, the employer is required under legislation to pay pension contributions for these workers.

You don’t have to stay in the scheme (or opt-in), but there are some very good reasons why you should and it’s definitely something to consider carefully.

Before you make a decision you should take time to understand the monthly pension contributions you’ll have to make and to explore what you’ll get from both your employer and the government, in the form of tax relief. It’s also worth casting an eye to the future and considering the lifestyle you’d like in retirement and how you’re going to pay for it.

The new rules were rolled out to the biggest employers first and they had to auto-enrol eligible employees into a qualifying workplace pension scheme from 1 October 2012.

Auto-enrolment duties are being phased in over a number of years and smaller and newer employers will have to fulfil their duties between now and February 2018.

To promote auto-enrolment to employees at these smaller firms the government has launched an advertising campaign, fronted by a giant furry mascot called Workie, who gets ignored by everybody. The campaign is trying to encourage every employee to explore exactly what they could get from their workplace scheme and to begin planning for the future.   

The cost of your workplace pension contributions

The new rules set a minimum annual amount that must go into your workplace pension scheme. At the moment the total minimum contribution is 2% of your qualifying earnings, which for the 2015/16 tax year are those between £5,824 and £42,385.

To make up the total minimum contribution of 2%, you have to contribute 0.8%, while 0.2% comes from the government as tax relief and 1% is paid by your employer.

Over the next few years these minimum levels will be increased and from 6 April 2018 the total minimum contribution will be 5%. You’ll have to contribute 2.4%, tax relief from the government will add 0.6%, and your employer will pay 2%.

Under the current legislation the last rise in these minimum levels will take effect from 6 April 2019 when a minimum of 8% of your qualifying earnings has to go into your workplace pension - 4% from you, 1% from the government in the form of tax relief and 3% from your employer.

You can work out what your contributions will be using this online calculator

What you’d pay today 

Let’s assume you earn £18,000 a year. Your workplace pension contributions would be calculated on £12,176, which is your salary (£18,000) less the minimum threshold (£5,824) for qualifying earnings.

Let’s also assume that the minimum pension contribution levels apply. On this basis the annual contributions to your workplace pension for the 2015/16 tax year would be:

  • £97.41 paid by you – 0.8%
  • £24.35 from tax relief – 0.2%
  • £121.76  paid by your employer – 1%n 

From April 2019 when the minimum total contribution level is set at 8% and assuming the minimum threshold has not been increased, the annual contributions would be:

  • £487.04 paid by you – 4%
  • £121.76 from tax relief – 1%
  • £365.28 paid by your employer – 3%

Using the example above for 2019, a total of £974.08 will go into your pension pot, although you are only putting in £487.04. That means your contribution is being matched by those from your employer and the government.

Imagine every time you paid money into your bank, double the amount was actually credited to your account. This doubling effect is exactly the impact created by employer and government contributions and it’s a powerful incentive to remain a member of (or opt-in to) your employer’s workplace pension scheme.

You might not like the idea of being automatically enrolled into your employer’s pension scheme or having to contribute 4% of your earnings each month from April 2019. But if you don’t start saving and planning for your retirement, then how will you afford the lifestyle you’d like in later life? And when it comes to good value, where else can you get your savings matched pound for pound?