Automatic enrolment 

Hargreaves warns against tinkering with pensions

Hargreaves warns against tinkering with pensions

The average worker could see their pension pot increase by £55,000 as pension contributions rise in April but any further hikes could be detrimental to savers, according to Hargreaves Lansdown.

Auto-enrolment rules will see minimum pension contributions increase to 8 per cent next month, with at least 3 per cent coming from the employer.

Data from Hargreaves Lansdown showed an employee on an average salary of £28,759 will pay an extra £30 a month in contributions come April.

The new rules will see the average employee pay £905 per year into a pension, while the combined employer and employee contributions will amount to £1,810 per year, up from £1,128 this tax year.

The change could boost these pension pots by half, or an extra £55,000 over their lifetime, Hargreaves Lansdown stated.

While these employees would have expected a pot of £94,308 at age 68 at the current level, the increase to 8 per cent contribution sees the projected pension rise to £150,893.

Employees on higher incomes of £50,000 will pay an average of £146.21 per month into their pension after April, up from £80.64 this year tax year, with combined employer and employee contributions totalling an average of £3,500 per year, up from £2,000 in 2018-19, according to the data.

The government has announced its intention to make two further tweaks in the ‘mid 2020s’, whereby enrolment would start at the age of 18, rather than 22, while 8 per cent of contributions would start from the first £1 earned. Currently the first £6,032 does not accrue a contribution.

Hargreaves Lansdown stated these pipeline changes were significant and warned the government should not rush to raise contributions any further.

Nathan Long, senior analyst at Hargreaves Lansdown, said: "Only relying on inertia to provide for us in retirement is dangerous. Auto-enrolment is a little like a cheap balloon at a kid’s party. The more you inflate, the better it gets, but at some point it cannot take anymore.

"The focus needs to switch to getting people to understand how paying in more personally or improving their investment returns may boost their income or allow early retirement, rather than forcing them to pay more in automatically."

Mr Long added: "It’s widely expected that opt out rates will remain low this time round, however this is not quite that simple.

"Since auto-enrolment was introduced 10m employees have been auto-enrolled into pensions, but around 11.5m were already in a pension.

"Many existing schemes already had contribution structures that required payments of at least 5 per cent, but far fewer paid 8 per cent contributions, so this latest increase will impact on more people."

Norman Stevenson, director of Cathedral Independent Financial Planning, said he had no particular concerns about enforced pension savings as long as they are affordable.

He said: "There are many people putting over 10 per cent of their earnings into their pensions, and these people aren’t necessarily on higher incomes.  

"But for most people, it’s not normal human behaviour to save, so whether you’re forcing them or encouraging them to put money away for retirement, it’s to their benefit."