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Martin lewis issues urgent warning on automatic enrolment rules – should you opt out?

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Martin Lewis covered pensions from multiple angles in his most recent Money Show, with the Money Saving Expert addressing the question of whether a person should opt out of automatic enrolment (AE). AE rules make it compulsory for employers to enrol eligible workers into workplace pension schemes and contribute to it but workers may have the option to opt out of said schemes, which some may do due to worrying about their income taking a hit.

Martin explained the rules in more detail: “Auto enrolment is the big change over the last five or 10 years.

“What this means is if you’re an employee, you are, in most cases, automatically saving into a pension without having to make a decision to do so, it is done for you.

“This happens to those aged 22 or over who earn more than £10,000 a year.

“Now, the contribution is a minimum eight percent of your earnings, but at least three percent of that has to come from your employer, so they’re giving you extra money they wouldn’t otherwise be giving you.”

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“As I explained, for you to contribute £100 a month, you don’t pay that because it’s before tax, the cost to you in your pay packet is £80 a month.

“So, you’re paying £80 a month in effect and you’re getting £160 a month saved, [for] higher rate taxpayers it’s even better, [it will] cost you £60 to save £160 pounds.

“So don’t opt out unless you absolutely have to.

“You are giving up, voluntarily, a pay rise if you opt out.

“Yes, I understand it reduces your take home pay, but the benefit for later in life is absolutely crucial.”

While Martin is clear on the benefits of AE, evidence of worker doubt appeared recently as the ONS released data on contribution rates.

According to their data, employee and employer contributions to DC schemes dropped by 11 percent and five percent between the first and second quarter of 2020.

The Government recently confirmed AE triggers would remain at £10,000 for the 2021/22 tax year but in light of the recent challenges, the Investing and Saving Alliance (TISA) called on Rishi Sunak to regularly review the AE framework going forward.

The organisation called on the Chancellor to launch an initial formal review by 2023, reduce the minimum age to 18 and remove the lower earnings limit of £6,240.

Renny Biggins, the Head of Retirement at TISA, commented: “To ensure that AE continues to be a success, we believe the framework needs to be reviewed periodically against a constantly changing backdrop including personal wealth, taxes and working patterns.

“For example, the number of multiple job holders is increasing. Many of these people who work multiple jobs do so part-time and are unlikely to reach the £10,000 threshold in a single employment to be auto enrolled. There is also the additional unintended consequence that many of the lowest earners will be hit by the net pay anomaly, meaning they will see their take home pay reduced by up to £64 a year.

“We urge the Government to undertake a formal review by 2023 and set a schedule for future reviews to ensure that AE is working for those it seeks to help the most.”

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