Five years after its launch, the UK's auto-enrolment pension reforms have led to a surge in membership of private pension schemes but there are now fears that plans to extend the scheme will dilute this success.
The number of people covered by auto-enrolment the rules that require employers to enrol their staff in an occupational pension scheme unless they opt out has now reached nine million, a new high, according to new government figures. The system, launched in 2012, initially covered only larger employers, but now extends to every employer in the country, no matter the size. The high level of membership follows very low opt-out rates at many employers, with government research showing that between 10% and 15% of employees, on average, opt out. Such rates are significantly lower than was expected.
However, there are concerns that these figures reflect the very modest cost of auto-enrolment pension contributions, which are currently so low that many employees barely notice the deduction. Right now, employees can't be required to pay more than 1% of their salary into the staff scheme, with at least a fifth of their contribution than recouped via tax relief; employers also have to pay in 1%.
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If the low minimum contribution rate is a significant factor in the scheme's success, increases in the cost of auto-enrolment could see opt-out numbers increase. From next April, the minimum contribution for employees will treble to 3% of pay, with plans for a further increase to 5% in April 2019. Employers will see their minimum contributions increase to 2% and 3% at the same time. For many this will mean a fairly noticeable drop in their pay someone earning £45,000 a year, for example, will see their income drop by £520 a year by 2019 because of the changes.
The changes could mean that the current level of pension-scheme membership proves to be a high-water mark, with younger savers earning less particularly likely to opt out. A quarter of millennials said they would opt out of auto-enrolment in the event of their minimum contribution rising to 2%, according to insurer Royal London, while more than a third said they would opt out if their contribution went as high as 5%.
Auto-enrolment extended to teens
Ministers confirmed this week that auto-enrolment will be extended to younger savers, with plans for reforms by the mid-2020s that will mean everyone over the age of 18 is eligible for the scheme.
Currently, workers aged 22 or over are included in the auto-enrolment system, unless they are earning less than £10,000 a year. Workers aged 18 to 21 can apply to join their work pension scheme if they're earning more than £5,900 a year, but aren't automatically enrolled.
This week, however, the pensions minister, David Gauke, announced that a government review of auto-enrolment had concluded that the scheme should be extended to younger workers. He plans to phase in the changes gradually over the next few years, though detailed proposals have yet to be unveiled.
The announcement has been welcomed by pension advisers, who point to the long-term gains from starting to save earlier, though the change could also mean that opt-out rates increase, with younger workers feeling less comfortable with giving up income for pension saving. Alternatively, auto-enrolment can mean some people save less than they would have done before joining a workplace scheme.
Are you saving enough for retirement?
More than six million middle and high earners are under-saving for retirement, according to data from the Department for Work and Pensions (DWP). The DWP defines "under-saving" as not contributing enough to a pension scheme to be confident of replacing a minimum amount of your pre-retirement income in old age.
For example, those earning less than £13,000 a year should be aiming for a pension income worth 80% of pre-retirement income; those earning more than £55,000 should be aiming to generate at least half their pre-retirement earnings Overall, 12 million Britons are currently not on target to achieve these minimums; around half that number are people currently earning more than £34,500 a year.
The figures will add to concerns that while auto-enrolment has boosted membership of workplace schemes, it has led to a decline in the amounts that many people are saving. The minimum contribution rates under auto-enrolment are substantially lower than the contribution rates that have traditionally been associated with occupational pension schemes, which have typically been between 5% and 10%. The minimum contribution rate for employers is much lower too.
Plans for higher contribution levels may go some way towards mitigating this problem, but savers will still not be required to contribute to the same level as has been required in the past.
Tax tip of the week
Taxes on new diesel cars will go up next year, while company-car drivers will also have to pay more to drive a diesel, reports BuyaCar.co.uk. From April 2018, most new diesel cars (those that don't meet current emission standards) will go up by one tax band, which will add between £15 and £520 to the cost of taxing a brand-new diesel car for the first time.
The rate of company-car tax on diesel vehicles will increase to four percentage points higher than for an equivalent petrol car (the current difference is three percentage points). However, fuel duty on petrol and diesel has been frozen until at least April 2019, and the higher road tax for diesel cars won't affect existing owners, as it only applies to the first-year tax rate for new cars.
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David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.
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