Younger employees to benefit in long term
LONDON (4 April 2019) – Aon, (NYSE:AON), a leading global professional services firm providing a broad range of risk, retirement and health solutions has said that increases in the legal minimum workplace pension contribution rates from 6 April will enable millions of employees to be significantly better off when they come to retire. The impact on individuals' current take-home pay will be largely offset by changes to income tax and National insurance thresholds which are due to come into force at the same time.
From 6 April, minimum pension contributions will increase to 5% of qualifying earnings from the employee and 3% from their employer for ‘eligible’ UK workers (generally those earning over £10,000 per year and aged between 22 and state pension age). Previously, the minimum level stood at 3% from the employee and 2% from the employer. Alternative methods of meeting the minimum levels using different rules for pensionable earnings are also increasing by similar percentage amounts.
Aon calculations have found that a typical 25-year-old, on the national average wage, who is in a company defined contribution (DC) pension scheme using the minimum contribution rates, will now pay around an extra £31 per month. However, after income tax and NI changes, their monthly take home pay will fall by around just £18 per month - or the equivalent of giving up two cups of coffee a week.
After the increase to company contributions and taking into account tax relief, the change will mean an extra £58 per month is be paid into employees' pension pots. This could result in around an extra £55,000 in today's money in an individual’s pension pot at retirement*.
Sophia Singleton, partner and head of DC consulting at Aon, said:
“Modern-day company pensions remain one of the best ways to save for later life – even if they no longer come with the guarantees of previous generations. The value of company contributions and tax relief added to individual savings - plus the potential returns and the cap on investment costs - mean that for most people workplace pensions are the best long-term savings option available.
“Auto-enrolment into workplace DC schemes has been with us now for seven years and while its roll-out has to be regarded as a success, there have always been reservations about the level of saving it involves and the level really needed for a comfortable retirement. These latest changes are an encouraging and necessary step in making certain that saving rates move up to a suitable level.”
Sophia Singleton continued:
“The example figures we have used to illustrate the effect of increased contributions are based on minimum pension levels, but our research shows that many employers offer contribution rates way above this. Employers will often pay more towards your pension savings if you contribute more, so it is always worth checking what is available from your own company pension.
“There has been much talk that employees might opt out from this increase – that they might be scared off by the reduction in take-home pay. But Aon's experience is that schemes that have already moved to default employees to the maximum company matching level have found over 70% have remained at that maximum level. We think that people generally accept that they should be saving more - so if we ‘do it for them’, it’s less likely that they will actively decide to reduce or cease their contributions.
“While Aon's 2018 DC survey found that people are expecting to go on working for longer than ever before - with over half of people now expecting to work beyond age 67 -, the importance of saving more and earlier cannot be over-stated. It will be a key factor in an individual’s ability to retire at the age of their choosing and with adequate savings.”
*The figures are based on 2019/2020 tax and pension rules, an average wage of £29,588 (ONS), 2019/20 qualifying earnings banding applied and assumed to increase in line with inflation of 2.5% to age 65. Pension charges are assumed to be 0.5% per annum. Contributions are assumed to be invested 80% in global equity funds, 20% in diversified growth funds until 10 years from retirement age, at which point funds are assumed to be switched gradually to be invested 55% in diversified growth funds, 20% corporate bond funds and 25% cash funds at retirement.
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Notes to Editors
Aon plc (NYSE:AON) is a leading global professional services firm providing a broad range of risk, retirement and health solutions. Our 50,000 colleagues in 120 countries empower results for clients by using proprietary data and analytics to deliver insights that reduce volatility and improve performance.
Aon announced in May 2018 it will retire the business unit brands of Aon Benfield and Aon Risk Solutions, which follows the retirement of the Aon Hewitt business unit brand in 2017. This move was designed to increase the rate of innovation across the firm and make it easier for colleagues to work together to bring the best of Aon to clients. Aon has five specific global solution lines: Commercial Risk Solutions, Reinsurance Solutions, Retirement Solutions, Health Solutions and Data & Analytic Services.
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