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Chase de Vere supports auto enrolment increase but warns on dangers

Patrick Connolly, Chartered Financial Planner at Chase de Vere

According to The Pensions Regulator, more than 10 million people have either started saving into a workplace pension, or are saving more, thanks to the rollout of auto enrolment. This is fantastic news as it means that considerably more people will be better prepared for their financial futures.

From 6 April 2019, the minimum contributions into auto enrolment will increase so that people will benefit from more money being saved into their pensions.

 

Date Employer minimum contributions Employee contributions Total minimum contributions
Before 6 April 2019 2% 3% 5%
From 6 April 2019 3% 5% 8%

 

However, while this is really positive, there are two main risks ahead.

  1. People opt out of their workplace pension schemes

For many people the message is still not getting through, as they don’t understand the importance of saving into a pension and that the earlier they start, and the more they save, the better off they will be in the future. This is why many people who have been auto enrolled into a workplace pension are only saving the minimum amounts.

The increase to the minimum contribution levels from 6 April could see more people opting out of their company schemes. Many people are struggling financially and if they see a fall in their net income in April, after the higher contributions come into effect, perhaps coupled with a fall in the value of their pension fund after volatile stock market performance, this could be the spur that pushes them to leave.

 

2. People think that the minimum contributions are enough

The higher minimum contribution levels which will be implemented from 6 April mean that people will have more money invested in their workplace pensions. However, they must be wary of adopting a false sense of security and thinking this will be enough to provide them with a comfortable standard of living in retirement.

For example, somebody who earns £30,000 per annum. Assuming their contributions increase by inflation each year, they achieve investment growth of 5% per annum after charges and take benefits at age 67.

 

With minimum contributions at the current 5% level

Age when start contributing Final amount at age 67 Final amount in today’s terms Income at 4% per annum in today’s terms
20 £326,336 £128,664 £5,147
30 £178,038 £85,567 £3,423
40 £91,004 £53,316 £2,133
50 £40,859 £29,180 £1,167
60 £12,771 £11,118 £445

 

With minimum contributions at the new 8% level

Age when start contributing Final amount at age 67 Final amount in today’s terms Income at 4% per annum in today’s terms
20 £522,138 £205,862 £8,234
30 £284,862 £136,908 £5,476
40 £145,606 £85,305 £3,412
50 £65,374 £46,688 £1,868
60 £20,433 £17,788 £711

With contributions at 12%

Age when start contributing Final amount at age 67 Final amount in today’s terms Income at 4% per annum in today’s terms
20 £783,207 £308,794 £12,352
30 £427,293 £205,362 £8,214
40 £218,409 £127,957 £5,118
50 £98,061 £70,031 £2,801
60 £30,650 £26,683 £1,067

 

Summary table

Age when start contributing Income with 5% contributions Income with 8% contributions Income with 12% contributions
20 £5,147 £8,234 £12,352
30 £3,423 £5,476 £8,214
40 £2,133 £3,412 £5,118
50 £1,167 £1,868 £2,801
60 £445 £711 £1,067

Patrick Connolly, Chartered Financial Planner, Chase de Vere, says: “It is clear that if people are investing 8% of their qualifying earnings into a pension, this can put them in a much better position than if they’re investing 5%. However, they cannot afford to be complacent, because only saving the minimum amount into a pension may still not be enough to provide them with a comfortable standard of living in retirement, even after employer contributions and their State pension are factored in.

“The government is unlikely to increase auto enrolment minimum contributions in the coming years, for fear this would lead to more employees opting out of their pension scheme altogether and so people must take responsibility for themselves

“While the numbers may look scary, you have to be realistic. Paying £40 each week into a pension now isn’t going to miraculously turn into £500 of income each week when you retire. It’s really important to start saving into a pension as soon as you can and aim to save as much as you can. A figure of 12% to 15% per annum could be a sensible target.

“As the workplace has become the forefront of many people’s pension planning, it is time for employers to stand up and be counted. Those employers who purport to care about the wellbeing of their employees should be facilitating financial education and advice in the workplace, to ensure their employees understand how their pension works, the benefits of paying in more than the minimum amounts and how important their pension can be for their financial futures.”

Chase de Vere is a national firm of independent financial advisers with offices at 1 Cornwall Street, Birmingham B3 2DX.

They provide independent financial advice and planning services for private individuals and businesses. You can find out more about Chase de Vere at: www.chasedevere.co.uk.