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19 Mar 2018

Auto-enrolment pension pots could grow by 30% this year as contributions rise

Upcoming increases in workplace pension contributions will provide a huge boost to pension pots, according to a new analysis from Aviva.

Under the rules for auto-enrolment pensions, contribution rates will increase next month from a total of 2% of qualifying earnings to 5%. Another increase will come in April next year, when the minimum contribution goes up to 8%.

Aviva has calculated that the average earner could see their pension pot grow by as much as 30% by the end of 2018 — from £2,825 in January to £3,664 in December for an employee earning the average UK salary who began saving into a workplace pension when auto-enrolment started in October 2012.

Based on current contribution levels, the same saver could have a total of £30,000 in their pension fund at retirement. However, with increased minimum contributions of 5% from April 2018 they could benefit from a £36,000 boost, more than doubling their total pension fund to £66,000 when they retire.

Adding in next year´s increase in contributions, the same saver would have £101,000 at retirement, representing another £35,000 in their pension pot and more than triple the amount they would have under current contribution levels.

However, some employees may need budgeting assistance to help them manage these increases.

A separate report by research firm F&TRC warns that further action is necessary if contributions are to be financially sustainable and not lead to increased opt-outs.

The company found that, with employee contributions set to rise from 1% to 5% over the next 13 months, workers on average earnings will find themselves contributing over 20% of their disposable income to their workplace pension — a level that could be unsustainable for many.

F&TRC called for pension providers and advisers to provide consumers with tools to help them budget more effectively, spend more wisely and save smarter so that the auto-enrolment contribution increases remain affordable and workers continue to save.

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