Martin Lewis of Moneysavingexpert: This law change means you’ve probably just had a pay rise (and a pay cut)
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Congratulations and commiserations. If you're an employee aged 22 or more, earning over £10,000 a year, you've likely just had a hidden pay rise and a hidden pay cut at the same time.
Congratulations and commiserations.
If you're an employee aged 22 or more, earning over £10,000 a year, you've likely just had a hidden pay rise and a hidden pay cut at the same time.
This may sound a bizarre possibility, but it is all about the pension auto-enrolment law. This says every firm must automatically opt-in all employees (aged 22 or more and earning at least £10,000) to save from their salary towards a private pension – to provide money for later life – on top of the state pension.
And the rules say if you are paying in, your employer must contribute too.
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In order words if you do NOTHING, you're saving for a pension. And for the new tax year, which started on April 6, the minimum amount that both you and your employer must contribute has increased substantially.
The effect, which you will see for the first time in your April payslip, is a bit of a mind twist:
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• Everyone who is opted in effectively gets a pay rise… as your employer is giving you even more money you wouldn't have got otherwise, even though it's not immediately usable.
• Everyone who is opted in gets less take-home pay. To get the extra money, you will have to contribute more. Therefore, your disposable income – the amount you can spend each month – is reduced.
If your company gives you a pension, where what you will get is based on the number of years you work and your final salary, that's a different scheme, so ignore this – it doesn't apply.
You could be paying three times what you were before.
The new tax year saw two main changes:
• The minimum your employer has to contribute has increased from 1% of your salary to 2% (so £200 a year per £10,000 of salary).
• The minimum total contribution from you and your employer together has risen to 5% from 2%.
For someone whose employer only offers the minimum, that means you were both paying 1%, but now it's paying 2% and you're paying 3% – in which case you'll see your contributions triple.
This is helped a little by the fact that tax changes this year mean most people will take home more on the same wages. Use the www.mse.me/taxcalc tool to see.
Plus if you're a graduate you may be about to pay far less back on your student loan. Have a look at www.mse.me/StudentChange blog to find out why.
It's worth noting some employers have much more generous schemes, in which case these minimums are irrelevant and you may not see a change.
The gain here is unbeatable.
Pension contributions are from pre-tax salary. So for a basic 20% rate taxpayer (someone earning roughly between £12,000 and £46,000), £60 a month going into their pension means a reduction in their pay packet of just £48, because it would have been reduced to this by tax anyway (higher-rate taxpayer only see a £36 reduction).
Plus for the first 3% you put in, your employer has to put in at least the minimum 2%. That means, even with the minimum contribution, for every £60 you put in, your employer would put in £40, so there's £100 added to your pension saving that only costs you £48 (£36 at higher rate).
Don't opt out unless you can possibly help it
If you're struggling, the thought of more money coming out of your salary may make you want to opt out or opt to reduce contributions. Yet do try to avoid that if at all possible: it would mean you're effectively giving up extra money from your employer.
In fact if possible, increase your contributions so you get your employer's maximum – the more you save now, the less likely a cold baked bean retirement.
There are a few decent reasons for opting out though, such as while you've got very expensive debts to repay, you're near retirement and have very little savings (in which case a bigger pension can reduce benefits) or you're lucky enough to be close or at the lifetime pension £1m allowance.
Martin Lewis is the founder and chair of MoneySavingExpert.com.