Auto-enrolment contributions will increase to 8% from 6 April 2019, meaning you’ll have to pay more into your workplace pension scheme. But that’s not the only major upheaval to pensions in the new tax year.
Introduced in 2012, auto-enrolment is a government initiative designed to help people save for retirement and almost 10 million people are saving through the scheme.
Companies are legally obliged to automatically sign eligible employees up to a workplace pension scheme. A percentage of your monthly salary is paid into a pension, along with contributions from your employer and a top-up from the government in the form of pension tax relief.
Here, we explain how the increase in auto-enrolment contributions will affect you and round up several other changes that will affect your pension from the new tax year.
1) Auto-enrolment rates increase
This means that in the new tax year 5% of your salary will go towards your workplace pension, up from the current rate of 3%.
The table below shows how auto-enrolment contributions have changed since they were first introduced.
|Date||Your employer’s contribution||Your contribution||Total minimum contribution|
|6 April 2019 onwards||3%||5%||8%|
|6 April 2018-5 April 2019||2%||3%||5%|
|Until 6 April 2018||1%||1%||2%|
The average UK earner is expected to see an extra £30 leave their pay packet each month, according to estimates from Hargreaves Lansdown.
Workers earning the UK average wage of £28,759 will contribute £75.41 a month from 6 April – up £29.96 from the current contribution rate of £45.45.
The increase is expected to give a significant boost to your pension savings.
For example, a 22-year-old on average earnings could have expected to build up a pension pot of £94,308 by retirement age with the current 5% contribution.
Once the rate increases to 8%, however, this projected pension pot jumps to £150,893 – an extra £56,585.
|Average earnings (£28,759)||Your monthly contribution||£45.45||£75.41||+ £29.96|
|Your employer’s monthly contribution||£37.88||£56.56||+ £18.68|
|Total contribution (inc tax relief)||£94.70||£150.82||+ £56.12|
|£30,000||Your monthly contribution||£47.94||£79.55||+ £31.61|
|Your employer’s monthly contribution||£39.95||£59.66||+ £19.71|
|Total contribution (inc tax relief)||£99.87||£159.09||+ £59.23|
|£50,000||Your monthly contribution||£80.64||£146.21||+ £65.58|
|Your employer’s monthly contribution||£67.20||£109.66||+ £42.46|
|Total contribution (inc tax relief)||£167.99||£292.43||+ £124.44|
While it might be tempting to opt out of auto-enrolment amid the increase, you’d also be losing out on your employer’s contribution and tax relief from the government, too – which is, in effect, free money.
Also, the earlier you start saving through auto-enrolment, the longer you’ll have to benefit from compounding interest which will help your pension pot grow.
- Find out more: pension auto-enrolment: how it works
2) Pension lifetime allowance 2019-20 rises
From 6 April, the pensions lifetime allowance will increase from £1,030,000 to £1,055,000.
The pension lifetime allowance is the maximum amount that you can put into your retirement savings, tax-free.
Each year, your pension lifetime allowance increases by the Consumer Price Index (CPI) measure of inflation from the year before; which in this case was 2.4%.
The graph below shows how the pension lifetime allowance has changed since 2006.
3) State pension rates 2019-20 go up
If you reached state pension age before 6 April 2016, you’ll get the basic state pension, plus any additional state pension you might have built up.
If you qualify for the state pension on or after 6 April 2016 you’ll receive the new single-tier state pension.
Both the basic and single-tier state pension are protected by something called the ‘triple-lock’ guarantee. This means that they rise each year by the greater of; the previous September’s CPI inflation, average earnings growth or 2.5%.
From April 2019, the state pension will increase by average earnings growth, which came in highest at 2.6%. The additional state pension on the other hand, only increases by the rate of CPI inflation, which in last September was 2.4%.
We’ve rounded up how much your payments will go up by:-
- New state pension: If you’re entitled to the full new single-tier state pension, your weekly payments will increase from £164.35 to £168.60
- Basic state pension: Those receiving the basic state pension will get a weekly boost of £3.25 a week – taking the total state pension from £125.95 to £129.20.
- Additional state pension: The maximum additional state pension cap will increase from £172.28 per week to £176.41 per week.
Is 2019-20 the year of state pension cuts?
In February, we revealed that thousands of people could face reductions to their state pension, following a government drive to clean up old pension records.
Those potentially affected have final salary pensions, and may find that their company pension scheme has been supplying incorrect or out-of-date information about their private pension, resulting in overpayments or either their private pension or the state pension.
Some people have had their pension payments reduced as a result.
One pensioner told us his state pension had been cut by almost £1,000 a year.
4) Pension credit rates 2019-20 increase
Pension credit is a means-tested benefit for retired workers and is based on their earnings. Both elements of pension credit payments will increase in line with the CPI inflation rate announced in the September previous – 2.4% in this case.
Here’s how each element of pension credit will increase in the 2018-19 tax year:
Guarantee credit tops up your weekly income so it reaches a minimum amount set by the government.
This will rise from £163 a week to £167.26 a week for a single person and £248.80 to £255.25 for a couple.
Savings credit is an extra payment from the government to reward you for saving towards your retirement.
The maximum amount you can get as a single person will increase from £13.40 to £13.72 a week. The minimum amount for couples will increase to £15.35 a week, up from £14.99.
Pension credit benefits have also been cut for some couples. Currently, couples of mixed ages are able to claim pension age benefits, such as pension credit, as soon as the eldest partner reaches state pension age.
But on 15 May, couples will only be able to claim pension age benefits once the youngest partner reaches state pension age.
Pension experts warn that the change could leave some couples more than £7,000 worse off a year.
Check out our guide on your state pension and benefits for more details on how the state pension works and other pension benefits you might be entitled to.