Martin Lewis: Prepare to pay for a hidden pay rise

This is all about ‘auto-enrolment’, where your employer must contribute towards your pension, and from 6 April 2019, it’ll have to give you even more.

The auto-enrolment rule means employers must opt in all employees over 21, who earn £10,000 from that job, to pay towards a private pension.

This is simply a savings scheme to provide money for you in later life, on top of the state pension. In other words, even if you do NOTHING, some of your salary will be put towards saving for a pension rather than be part of your take-home pay.

Yet if you do this, the firm must also contribute extra to this pension fund. And the big news is that from 6 April, in the new tax year, the minimum amount both you and your employers will contribute is increasing substantially.

The effect of that is a bit of a mind twist…

EVERYONE WHO IS OPTED IN EFFECTIVELY GETS A PAY RISE… as your employer is giving you even more money, even though it’s not immediately usable.

EVERYONE WHO IS OPTED IN GETS LESS TAKE-HOME PAY… to get the extra money, you’ll usually have to contribute more too; so your disposable income, the amount you can spend each month, is reduced. Thankfully this will be offset by the fact most will also pay a little less tax as income tax thresholds are increasing at the same time (see www.mse.me/taxcalc)

Yet if your company gives you a final salary pension, where the amount you get is based on the number of years you worked for it and your final salary, it means you’re part of a different scheme.

Yet if your company gives you a final salary pension, where the amount you get is based on the number of years you worked for it and your final salary, that means you’re part of a different scheme. If it meets the minimum standards the government has set with auto-enrolment for things such as charges, default investment funds, and not just contribution amounts, joining auto-enrolment doesn’t apply.

The 6 April 2019 changes

• The minimum total auto-enrolment contribution rises to 8% (from 5%) of your pre-tax salary above £6,316 and below £50,000 (£43,430 in Scotland.)
• The minimum your employer has to contribute to that increases to 3% (from 2%) of your salary between the limits above.

So if your employer is only putting in the minimum 3%, your contribution will automatically rise to 5% to meet the maximum total (ie £200 per £10,000 increase) without you doing anything.

If your firm puts in more than the minimum, your contribution won’t need to rise as much. For example, if it puts in 4%, yours will only need to rise to 4%. Do check your own scheme.

Opting out of auto-enrolment is a mistake for most

If you want to you can opt out of contributing to your pension. Yet don’t do it unless it’s a last resort, because that means you’re effectively giving up extra money from your employer.

Of course if you’re struggling, you may be tempted, as losing disposable income is hard to bear.

Yet I’d only consider it if you’ve very expensive debts like payday loans, in which case clear them, then opt back in. Or if you’re near retirement with little savings, there is a rare scenario that having a bigger pension pot could reduce your benefits. Or if you’ve already a very large pension and it’ll take you over the £1.03m lifetime allowance.

Otherwise steer clear. Opting out runs the risk of a cold baked bean retirement, as whether in future the state pension alone will be enough to live off is questionable. This is about saving now, so your living standards don’t plummet later.

So it’s thankful that the lazy option of DOING NOTHING means you’ll automatically be saving towards your pension. Many people are scared of making financial decisions, and inevitably most of us are guilty of sacrificing the future for the now. This way, make no decision, and it’s hopefully the right one.

And if you are really thinking of opting out because you need more take home pay, you may be able to reduce your contributions and still get something from your employer -it’s worth checking.

How to pay HALF your pensions cost

In the 2019/20 tax year the tax for most people works roughly as follows (it’s slightly different in Scotland)

• Personal allowance on earnings up to £12,500 (the amount you can earn with no income tax)
• On income from £12,500 to £50,000 you pay the basic 20% rate of tax
• On income above £50,000 until £150,000 you hit the 40% rate.
• All income over £150,000 is at 45%

Yet pension savings come from PRE-TAX salary. Putting £100 a month in your pension (the likely contribution of someone on a typical £24,000 salary) only reduces a basic rate taxpayer’s pay packet by £80, a higher 40% rate taxpayer’s by £60.

Plus as on the minimum contributions level, if you put in £100, your employer must put in at least £60, so there’s a total £160 added to your pension, but that only costs you £80 (£60 at higher rate) in other words half the cost. That’s unbeatable.

And if you are thinking ‘but all pensions are crap’, actually that’s not true. A pension is a tax efficient way to save for your old age. The issues haven’t been with pensions themselves, but with what most people were told to invest their pension cash in – which for many years was dismal.

Thankfully while things still aren’t perfect, and there are no guarantees with investments, most modern pension investments are much more transparent and the charges are lower.

Martin Lewis is the Founder and Chair of MoneySavingExpert.com. To join the 13 million people who get his free Money Tips weekly email, go to www.moneysavingexpert.com/latesttip.