Your IndustryDec 3 2015

State pension boost and auto-enrolment delays

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The basic state pension will increase by £3.35 a week, bringing it to £119.30 a week.

For those retiring on or after 6 April 2016, the new single tier state pension will be at least £155.65 a week but achieving this level will depend on having 35 qualifying years of national insurance contribution.

There will be a deduction for those who were contracted out of the additional state pension.

Glyn Bradley, senior associate of Mercer, says it is vital advisers convey to their clients the so-called full rate that will have been spotted on newspaper front pages last week is only a headline figure.

He says: “Some people will get more; some people will get less, especially in the next 20 years.

“People need to be given personalised statements of what they can expect from the new system and when – this may need the DWP to write to them soon, rather than relying on people to pay attention to pensions or apply for forecasts.”

The government also announced it will delay the next two scheduled increases of the minimum defined contribution pension contribution rate by six months each, to align these changes with the start of the tax year.

Instead of increases taking place in October, they will now occur in April the following year.

Increases in contribution rates for automatic enrolment will therefore be delayed until April 2018 to April 2019.

In terms of the new timing, David Robbins, a senior consultant at Towers Watson, says the timetable for implementing the automatic enrolment reforms has already been delayed time and time again.

He says: “It is a fight that the Treasury keeps having with the DWP and that the Treasury keeps winning. This time, it may have been seen as an easy sweetener to ask for as part of the deal on in-work benefits.

“Even with no further delays, it will now be April 2019 before minimum contributions are fully phased in.

“By then, it will be over 16 years since the seeds of this policy were sown when the Pensions Commission was asked to look at solutions to under-saving.”

When employers automatically enrol staff, Mr Robbins notes they have to tell them what contributions will be paid, including when contributions will increase in future.

He says employers who used The Pensions Regulator’s letter templates will have already told staff that contributions would increase in October 2017 and October 2018.

Until the regulations are published, he says it may not be clear whether all employers can change this arrangement without consulting employees.

But the delay in raising the contribution levels isn’t all bad news, says Jonathan Watts-Lay, director of Wealth at Work.

He Watts-Lay says on the plus side at least the change brings automatic enrolment in-line with the changes made to pension input periods in the summer.

Alan Fergusson, director of employee benefits at Mattioli Woods, adds the delay is good news for employers who can push back expenditure.

On the flipside, the delay is not so good for millions of employees who will not receive the higher contributions at the time they thought they would.

Morten Nilsson, chief executive of workplace pensions provider Now: Pensions, points out that while on face value, a delay of six months on each rate rise seems inconsequential an average earner could miss out on £770 of pension savings.

His calculation is based on a salary of £26,200 for somebody auto-enrolled who has been paying minimum contributions since October 2012.

He says: “Moving the goalposts causes unwanted and unnecessary confusion for employers. It also gives entirely the wrong message to savers.

“Rather than slowing the process down, the government should be looking to increase contribution rates.

“The reality is auto-enrolment minimum contributions won’t be enough for a comfortable retirement but savers are under the illusion that auto enrolment will safeguard their future finances.”