Evaluating auto enrolment contributions

Evaluating auto enrolment contributions

Appreciating the importance of saving for our later years is absolutely nothing new.  A quick look at the literature of centuries gone by easily shows how long people have valued what we would now call retirement savings.  What has changed, drastically, is how long we are likely to have to live off those retirement savings.  So, arguably, it could fairly be said that even though we now have the state pension, it has never been more important to have independent, private savings for retirement.

Understanding the state pension

You do not “pay for your state pension”, you pay national insurance contributions which are used for various purposes, one of which being to fund the state pension.  The amount of state pension you receive and, crucially, the minimum age at which you can receive it are both set by the government.  It doesn’t matter if you are a higher earner, paying significant contributions, or a non-earner having NI contributions credited as part of your benefits, under the current system, assuming you have been credited with NI contributions for the same period, you will receive the same amount at the same time.  The only control you can exert over your pension is to opt to defer receiving it in order to increase your level of payment.

Abolishing the state pension completely would be a politically-charged move, but cannot entirely be ruled out.  Another possibility would be to see the state pension in its current form phased out and incorporated into Universal Credit or Universal Basic Income.  Again, these would be potentially controversial steps but cannot be ruled out.

Saving for retirement privately

Over recent years, politicians of all shapes and sizes have been quite open about their desire to make pension saving attractive again after scandals (Robert Maxwell, Equitable Life...) shook public confidence in them and frustration at the restrictiveness of annuities was compounded by the low returns they offered.  The introduction of auto-enrolment pension schemes was, from a certain perspective, an astute move, since it forced people to take action if they wanted to opt-out of pension savings rather than forcing them to remember to opt in and it encouraged them to stay put with the offer of “free money” from their employer.  Of course, the money is not really free, since employers will take it into consideration when deciding what salary offer to make, but it is subject to favourable tax treatment, which would not have been the case had it been given as standard income. 

The sticking point with the auto enrolment scheme, however, is that the minimum level of contributions is set by the government.  Up until April 2018, the employee contribution was only 1%, as of April it became 3% and in April next year it will increase again to 5%.  While these increases may sound small, they can make a significant impact on your take-home pay and there is no guarantee that the increases will stop at that level.  Governments have to balance the current needs of employees (and employers) with balancing their books in future years, which means that they are very likely to do all they can to encourage the maximum level of retirement saving the economy in general will support.

Opting out of the auto-enrolment scheme is a serious decision, even if you are at the start of your working life, however it may be the right one if you are struggling to make ends meet in the present and ideally it would only be a short-term move.  If you believe that you are going to need an extended period of breathing space to set your finances in order, then it might be worth asking your employer if they will voluntarily pay their part of the contributions into a private pension for you.

If you have any questions please contact your local Charles Derby Financial Adviser today on 0800 849 1279 or email This email address is being protected from spambots. You need JavaScript enabled to view it.