The hike in auto-enrolment contributions from 3 to 5 per cent in April, will have a minimal impact due to pay rises and a more generous income tax system, research has concluded.
In its 16-page policy paper ‘What will be the impact of the April 2019 step-up in automatic enrolment contribution rates?’, Royal London looked at a worker earning £20,000 per year in 2017/18, about the typical wage of the auto-enrolment population.
The mutual insurer assumed a 3.2 per cent pay rise in April and an increase in pension contributions from 3 to 5 per cent.
April will see an above-inflation increase in the personal allowance for income tax and an above-inflation increase in the national living wage.
These factors, together with annual pay rises, are expected to cushion the impact of contribution increases, leaving many workers with a post-tax pay rise in April, despite the increase.
Royal London's imaginative worker still gets an increase in take-home pay in April of £244 per year, about 1.5 per cent.
Minus income tax
Minus National Insurance
Although this is below the rate of inflation and will represent a squeeze on living standards, the fact that pay is still going up, combined with the power of inertia, is likely to mean that few people will respond by pulling out of pension saving, the insurer suggested.
In addition, the example assumed that the worker is paying 5 per cent gross of their total pay. The legal minimum however is to pay contributions only on a band of ‘qualifying earnings’ above a floor of £6,032, which will further reduce the cash impact of the contribution rise for many workers, the insurer noted.
This view was reinforced by the behavioural response to the first increase of auto-enrolment contributions in April 2018, when contributions rose from 1 to 3 per cent for employees.
FTAdviser reported in October that the three biggest master trusts in the market – Nest, Now: Pensions and The People’s Pension - saw an increase of a mere 0.2 percentage points in the number of people that stopped saving into their workplace pension scheme after the last minimum contribution hike.
Sir Steve Webb, former pensions minister and director of policy at Royal London, said there was "good reason to be optimistic about the impact of the next step-up in contributions".
He said: "A very timely increase in the tax-free personal allowance, plus a large rise in the national living wage will all help to boost pay-packets in April.
"For a typical worker who gets an average pay rise, we find that their take-home pay will still go up in April, even allowing for the increased pension contributions. The bigger challenge is likely to be getting those 8 per cent total contributions up to more realistic levels in future."
Mike Lacey, partner at Berkshire-based financial adviser firm Bowman Pension Consulting, said: "We’ve seen very little to make us believe that employees will opt-out or cease membership following the next rise in contributions.
"The increase has been well signposted and staff have now had some years in order to get used to the idea of taking some responsibility for their retirement. Auto-enrolment would seem to be a great success."