Government warned against further AE contribution increases

The government should refrain from increasing the minimum contribution level for auto-enrolment schemes further, once the April increase comes into force, according to Hargreaves Lansdown senior analyst, Nathan Long.

Long described auto-enrolment as “a little like a cheap balloon at a kid’s party”, in that it gets better the more you inflate it, “but at some point it cannot take it anymore”.

He continued: “The focus now 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.”

In April 2019, the minimum contribution level is set to increase to 8 per cent, comprising of at least 3 per cent from the employer.

Research from Hargreaves Lansdown has found that the new rules will result in the average saver paying £905 per year into their pension, but after contributions from the tax man and their employer this rises to £1,810.

This means that someone on average earnings could have a pension pot valued at £150,893 at the age of 68, if they began saving aged 22, an increase of £55,000 from the total at the current minimum contribution level.

Long warned that the upcoming increase could impact savers and their employers more than the April 2018 rise.

He commented: “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, 10 million employees have been auto-enrolled into pensions, but around 11.5 million 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.”

Long concluded that, although the increase could have a negative impact for some, it could still result in more positive retirement outcomes.

He said: “Auto-enrolment has revolutionised retirement saving in the UK, with our pay packets absorbing all that’s been thrown at them so far.

“Lower take home pay could put pressure on families, although these higher contributions have the potential to power up your pension by half, so persevering remains pertinent.

“The scheduled jump in the personal tax free allowance will also help offset some of this cost.”

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