Pension savers who are currently auto-enrolled will see their contributions rise from 2% to 5% at the start of the new tax year on April 6.
According to number crunching by Aviva, the pension firm, the hike will result in an employee earning the UK average salary of £26,572 having £840 added to their savings pot during the 2018-19 tax year.
Currently, minimum workplace pension contributions have been set at 2% (1% from each the employee and employer) for those who earn at least £5,824 a year, with the upper limit standing at £45,000 a year.
However, from April 2018 the overall minimum level will rise to 5% (with employees contributing 3%, and employers paying in 2%). Further rises are set for April 2019, when the level of contributions will rise to 8%.
So far, auto enrolment has been heralded a success. But its success is largely down to people’s inertia. Many savers may not even know that they are contributing some of their income towards a pension, or they may consider it negligible because the level of contributions is so low.
However, drop out rates might increase once levels of contribution rise and people begin to notice that a chunk of their salary is missing. This is especially likely if the current squeeze on consumers continues.
Auto-enrolment was created to encourage young people to save in particular. Given the intergenerational divide and younger people’s lack of assets or savings, it will not be a surprise if young people decide to opt out of their pension in favour of saving for a house deposit, or even to keep up with living costs.
The Government has published assumptions that the opt out rate may increase from around 10% currently to 21.7% after April 2018 and 27.5% in April 2019.
Commenting on these opt out figures, Steve Cameron, pensions director at Aegon, says: "Hopefully these will prove overly pessimistic but they highlight the challenge government, employers and the pensions industry has in encouraging the millions of auto-enrolees to stay in their workplace pension.
"Anyone who does opt out or leave their workplace pension is giving up on ‘free money’ from their valuable employer contribution as well as tax relief from the Government. While money is tight for many people, budgeting to continue to pay contributions to a workplace pension could make a big difference to living standards in retirement."
This article first appeared on our sister website Money Observer