I know what you’re thinking – “He’s going to be writing about Brexit”.
Well, I’m not. I’ve just sat through interminable news coverage on my way into work about the political bickering, party machinations and general hysteria that has characterised the last 6 months of chaos for the country, and on the basis that I think I’ve suffered enough, I’m not going to transfer the suffering over to you. You can thank me later.
What I am going to write about is a subject I also did an article on just on a year ago. You can read it here .
For those of you who have decided to skip the link, what I was saying in 2018 was how disappointed I was that Government (via the DWP) had done almost nothing to communicate the increases in minimum pension contributions that were imminently arriving.
Here we are 12 months later, with another increase due in a few weeks and, once again, I am aghast at the lack of communication. Not as aghast as last year, admittedly, but only because my expectations are now so much lower.
So, for those of you who have been passed by, let me break the news to you.
If you’re one of a majority of employers whose strategy has been to comply with the law and no more, the amount you need to pay into your employees’ pensions from April will increase from 2% to 3%.
If you’re an employee who, similarly, has been following the route of minimum contributions only, the amount you’ll have to pay from April is 5%, going up from its current 3% level.
The fear is that these increases will be more than people can bear and will lead to a spike in people choosing not to continue with pension saving and, hence, be putting their futures at risk for the sake of today’s take home pay.
So, let me try and add a bit of context to these changes.
For employers, the increase in contributions is only the same level as 12 months ago when the minimum amount went from 1% to 2%.
Similarly, for employees, the increase in 2018 was from 1% to 3%, so a jump from 3% to 5% is of equal magnitude although it does mean that the figure that will be on payslips for pension deductions will be at its highest level yet.
The 2% increase for employees will be offset, to some degree, by the increase in the Personal Allowance that also takes effect in April.
The Personal Allowance is the amount everyone can earn before they start paying Income Tax. It is £11,850 in 2018/19 and is rising to £12,500 in 2019/20. That’s an extra £130 a year for someone with a full Personal Allowance.
The NI bands are also moving – although the rates are unchanged – which will also have a minor effect for most people.
The net effect will, therefore, be that the reduction in take home pay will be less than it was in 2018 as the Income Tax and NI bands have moved a greater distance than they did last year.
So, that’s the short term view out of the way. In a nutshell, there are increases coming, borne mostly by employees, that will result in a small reduction in take home pay.
For most, this increase will be an annoyance at worst but eminently affordable (I acknowledge that for some, the increase will be the straw that breaks the camel’s back and they will need to stop saving). Those people should be looking long-term.
Choosing to stop contributing to a pension now will be the worst of all worlds.
Firstly, the amount paid in, inaccessible until the employee reaches their mid to late 50s, will be relatively small and of no use to either the employee in the future or the pension provider.
And, secondly, it will be condemning the employee to a retirement wholly reliant on the State Pension. For most, this will be a maximum of around £8,500 a year – hardly a realistic income on which to live.
So, why hasn’t the Government acted? Obviously, they have had other things on their minds but this has been known about since 2012 (a good 4 years before the referendum that got us in the mess we’re in at the moment) so the answer is… I just don’t know.
This information is provided strictly for general consideration only. No action must be taken or refrained from based on its contents alone. Accordingly, no responsibility can be assumed for any loss occasioned about the content hereof and any such action or inaction. Professional advice is necessary for every case.
Peter Murphy Dip PFS