Ian flags that while the upcoming hike may reduce wage growth, the long-term positive impact to pensions is of vital importance. Particularly, as separate figures from the Office for National Statistics today has shown income inequality in retirees is not decreasing as they are more reliant on private pensions.
"The latest auto-enrolment report from the Department for Work and Pensions makes for comforting reading for policymakers as, among other findings, it shows that while employers are unaware that their pension contributions will jump from 3% to 5% in April, they feel either neutral or positive about it when they are made aware.
"In fact the qualitative research reveals that only a small proportion have opted-out and the majority of those were over 50 with a rationale that they had already built up sufficient retirement provision elsewhere.
"Analysis from Quilter shows that those earning between £45k to £60k will see the smallest wage increase this tax year after the auto-enrolment rate hike, with their wages going up by just 0.6%. However, the long-term impact of the rise in contribution rates will mean that pension pots will be about 66% higher at retirement than they would’ve been if contributions stayed at 3%. The impact will be felt across the wage spectrum with those earning over £60k seeing around a 1.32% increase and those earning around £30k only taking home about 1% more than the previous year.
"However, complacency will be toxic to the policy as relying solely on the power of inertia for the continual success of auto-enrolment remains a real risk when you consider the general low level of pension contributions. Over the course of the next year the industry and government need to do more to ensure we are boosting engagement and education. As the report revealed, workers who are enrolled typically spent little time considering the idea and although they often said they wanted to save more for retirement, very few were contributing more than the minimum rate to their pension.
"We need to hammer home that foregoing yet more of their salary is not only worth it, it is necessary. Because without investing today the current generation risks poverty in later life.
"Separate figures from the ONS today show that income inequality in retired households had been growing since 2010 is now unchanged. While welcome it shows that the gap in inequality, caused in part by a shift to reliance on private pension rather than state benefits isn’t narrowing. With the state taking an ever decreasing role, the pension pot built through AE will be even more valuable."