This may sound a bizarre possibility, but it is all about the pension auto-enrolment law.
This says every firm must automatically opt-in all employees (aged 22+ earning at least £10,000) to saving from their salary towards a private pension – to provide money for later life – on top of the state pension.
And the rules say if you are paying in, your employer must contribute too.
In order words if you do NOTHING, you’re saving for a pension. And for the new tax year, which started on 6 April, the minimum amount that both you and your employer must contribute has increased substantially.
The effect, which you will see for the first time in your April payslip, is a bit of a mind twist…
Everyone who is opted in effectively gets a pay rise… as your employer is giving you even more money you wouldn’t have got otherwise, even though it’s not immediately usable.
Everyone who is opted in gets less take-home pay… to get the extra money, you will have to contribute more; so your disposable income – the amount you can spend each month – is reduced.
If your company gives you a pension, where what you will get is based on the number of years you work and your final salary, that’s a different scheme, so ignore this, it doesn’t apply.
You could be paying three times what you were before.
The new tax year saw two main changes…
The minimum your employer has to contribute has increased from one per cent of your salary to two per cent (so £200 a year per £10,000 salary).
The minimum total contribution from you and your employer together has risen to five per cent from two per cent.
For someone who’s employer only offer the minimum, that means you were both paying one per cent, but now it’s paying two per cent and you’re paying three per cent – in which case you’ll see your contributions triple.
This is helped a little by the fact tax changes this year mean most people will take home more on the same wages use the www.mse.me/taxcalc tool to see.
Plus if you’re a graduate you may be about to pay far less back on your student loan, see my new www.mse.me/StudentChange blog for why.
It’s worth noting some employers have much more generous schemes, in which case these minimums are irrelevant and you may not see a change. The gain here is unbeatable.
Pension contributions are from pre-tax salary. So a basic 20 per cent rate taxpayer (someone earning roughly between £12,000 and £46,000), having £60 a month put in their pension, only sees their pay packet reduce by £48, because it would’ve been reduced to this by tax anyway (higher-rate taxpayer only see a £36 reduction).
Plus for the first three per cent you put in, your employer has to put in at least the minimum two per cent.
That means, even with the minimum contribution, for every £60 you put in, your employer would put in £40, so there’s £100 added to your pension saving that only costs you £48 (£36 at higher rate).
Don’t opt out unless you can possibly help it
If you’re struggling, the thought of more money coming out of your salary may make you want to opt out or opt to reduce contributions.
Yet do try to avoid that if at all possible, it’d mean you’re effectively giving up extra money from your employer.
In fact if possible, increase your contributions so you get your employers maximum – the more you save now, the less likely a cold baked bean retirement.
There are a few decent reasons for opting out though, such as while you’ve got very expensive debts to repay, you’re near retirement and have very little savings (in which case a bigger pension can reduce benefits) or you’re lucky enough to be close or at the lifetime pension £1m allowance.
Martin Lewis is the Founder and Chair of MoneySavingExpert.com. To join the 13 million people who get his free Money Tips weekly email, go to www.moneysavingexpert.com/latesttip.
