AE contributions to eat a fifth of disposable income from 2019
The rise in auto-enrolment (AE) contributions over the next 13 months will have a "severe impact" on the average worker's disposable income, according to independent analysis.
The increase in total contributions from 2% to 5% next month and from 5% to 8% in April 2019 will see a surge in pension costs as a proportion of disposable income, especially if employers only contribute at the minimum rates required.
The analysis by the Finance and Technology Research Centre (F&TRC) found that an employee with the average UK annual salary of £27,782 and with the average UK disposable income of £326 per month, would see contributions surge from 4% of disposable income to 13% next month. In April 2019, this would then increase to 21%, the research company said in its Making Savings Affordable report.
Providers and advisers need to support savers build their budgeting capabilities, it added, via new tools including Open Banking software, which allows companies access to individuals' banks accounts with their permission.
F&TRC director Ian McKenna urged employers to support their staff's budgeting ability.
"AE has been very successful to date, especially in reaching low to middle income earners," he said. "However, as employee contributions are set to rise, our research shows that the burden it will place on the disposal income of the average UK employee could be too great for it to succeed without more work being done to help the workforce budget better.
"What we don't want to see, after so much good work to date, is employees opting out, making them even less prepared for their future and throwing away the additional 4% they receive in employer contributions and tax relief."
Syndaxi Financial Planning managing director Robert Reid added: "We need to engage people in their future by making their present better; that comes from making budgeting the smart thing to do rather than a chore to be avoided."
However, the analysis did not factor in changes to the personal tax allowance in April, when it will rise from £11,500 to £11,850, giving savers an additional £5.83 of take home pay, or to the National Insurance primary threshold, which will garner an extra £2.60 for basic rate workers. These changes, plus expected positive real wage growth, could help to mitigate the cost of AE rate rises.
A DWP spokesperson said these increases, among others, would help: "Saving into a workplace pension is one of the best financial decisions consumers can make. Any savings put aside will benefit from employer contributions, compound interest and possible tax relief.
"Over 9 million employees are newly saving or saving more as a result of automatic enrolment, many will not see a fall in their take home pay due to the increase in contributions being matched by increases to the personal tax allowance, pay increases, and the national living wage."
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