The pay of average workers is to be cut by nearly £400. Good | Money

Take a close look at your pay packet next month. If you are on average pay for the UK (£29,000 a year) there’s a good chance it’ll be £30 less that you were expecting. You won’t be alone; about 10million workers in the UK will see these sorts of cuts in their pay. One estimate suggests that it will be equal to an 8% cut in the disposable income that most people have after paying for their basic bills.

So what’s going on? Lots of higher earners may never have heard of auto-enrolment – but for workers on average or below average incomes, it will probably be the biggest financial event of the year.

Auto-enrolment is the scheme set up by the government in 2012 to make sure that everyone, whether they work for a supermarket or the corner shop, gets a private pension to add to their state pension.

Most middle class earners working for big companies won’t have noticed because they already have a company pension scheme, so it doesn’t affect them. But for lower earners previously excluded from pension schemes – perhaps at the local hair salon or car repair yard – it’s big news.

The government eased the scheme in by requiring relatively low contributions at first – and allowing workers (not employers) to opt out if they want.

But from 6 April this changes significantly. Employers will have to put in 3% of pay, while workers will have 5% of their salary deducted. For someone of £30,000 it means an additional £380. For someone working 35 hours a week on the national minimum wage, it means their deductions will rise from £246 to £440 a year from April. That’s nearly £200 that minimum wage workers will sorely miss.

Some employers may also use this as a tool to argue against pay rises, saying they are already in effect being forced to pay workers 2% more this year anyway. But to be fair to small employers, there has been remarkably high compliance – the first prosecution for failing to set up a pension for workers wasn’t until 2018, and that was a small bus company in Oldham. The vast majority have knuckled down and got on with it.

Just as impressive has been the response from workers. Ahead of the scheme being introduced, there was talk of opt-outs reaching 20% or even 30% of workers. In the event, the figure has been a fairly consistent 9%-10%.

Will it be worth the sacrifice? In January, MPs grilled Now:Pensions, one of the companies that manages the money on behalf of 2 million workers, after it reported gains of just 3.1% over three years. Most major providers, such as the government-backed Nest, made decent returns of around 10%.

More important is what will happen over the next 30 years, not three. Advisers AJ Bell reckon that at current contribution rates, a 24-year-old today who earns £30,000 a year across their lifetime will build up a fund worth £322,000 by age 65, in today’s prices. That’s equal to an income of around £16,000 a year until their mid-90s, which on top of a state pension of around £8,500 brings you to nearly £25,000 a year. Not luxury, but not shabby either.

But this comes with a major caveat. The figure above assumes that you and your employer pay the contributions on all your income. Currently, you have to pay auto-enrolment contributions only on that part of your income above the starting point for national insurance – which is £ 6,136. The government has said it will eventually make employers (and workers) pay contributions on all their income, but have not said when. Maybe it’s just another one of those things that has got lost in the government’s timetable as Brexit dominates everything. But in 30 years’ time it may turn out to be more important than that Brexit thing that happened half a lifetime ago. Remember that?

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