The rise in pension contributions have been met with widespread approval among those who have been automatically enrolled in workplace pension schemes, new research has revealed.
The YouGov survey carried out on behalf of the National Employment Savings Trust (NEST) found that three quarters of employees felt positive towards the increase and over four in five said they were ‘enjoying’ saving for retirement.
This month, mandatory auto enrolment total contribution rates have increased from 2 per cent to 5 per cent. But despite many fearing the increase would lead to a surge in opt-out rates, the NEST survey of 851 workplace pension scheme members indicates that employees do on the whole appreciate the automatic enrolment scheme and will not be opting out.
“If this survey is an accurate representation of UK employees, it demonstrates that workers are beginning to understand that whilst making provision for retirement is a personal responsibility, the current regime enables them to take the steps required to start controlling their own retirement planning,” said Adam Burn, principal at Aon. “The increased contributions being deducted straight from salary, coupled with higher levels of payments from employers, are likely to mean better potential outcomes.”
Zoe Alexander, NEST director of strategy described the latest data as ‘positive’ and said people were ‘appreciating’ the ability to ‘build a nest egg’ for retirement.
“[They] recognise that saving more into their pension is in their best interests. Everyone needs to save for retirement and thanks to AE [auto enrolment] millions more workers are doing just that, improving retirement prospects for people all over the UK,” she said.
The recent rise has the potential to boost retirement income to up four times the amount than if pension contributions stayed at 2 per cent, Alexander added. So for a 21-year-old earning £23,000 a year today, with money invested in Master Trust’s Retirement Date Fund and generating returns of 2-3 per cent above inflation, the 5 per cent pension contribution increase could see their retirement provision increase to £125,000, assuming wages and pension contributions rise in line with inflation (2.5 per cent).
According to Professional Pensions, the rise is likely to reduce take-home pay to some extent, but this will be ‘mitigated’ by the increase in the personal tax allowance (risen by £350 to £11,850) and National Insurance thresholds (risen from £157 to £162/week for employers and employees).
Burn added: “The truth is that most individuals are aware that they need to make their own plans for retirement, especially with the changes to state pension age, but this has required some action on their part. The automatic increase to the amount paid via salary deductions plus the increase in employer contributions means that no action is really needed in order to increase the potential benefit that will be received in retirement.”
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