Ten million workers in the UK will now see a bigger chunk of their wages automatically diverted to a pension, starting with their next pay packet.
New rates taking effect on Saturday mean employees, employers and the government will all contribute more to these pension pots.
That will mean less take-home pay for many people who are automatically enrolled into a workplace pension.
However, workers have the option of opting out of the scheme at any time.
This creates a choice between saving for the future or taking money now.
What is happening?
Ten million people aged 22 and over, who earn more than £10,000 a year and who were not already in a company pension scheme, have been automatically enrolled into saving for old age through a scheme which began in 2012. More will be enrolled in the future as they start work or new jobs.
This latest change marks the final increase in contribution rates designed under the scheme.
For someone earning £30,000 a year who is in an auto-enrolment scheme, the change means putting an extra £32 a month from their pre-tax pay into their pension pot.
But any dilemma on whether to continue with these contributions or opt-out of contributing to a pension has been eased by a tax cut which also takes effect from now. More than 30 million people now only have to pay income tax on earnings above £12,500 a year, rather than above £11,850.
Analysts also say that by choosing to opt-out of this automatic pension saving, workers would actually lose out on the money their employer puts into their pension pot.
“Anyone who chooses to opt-out is basically taking a voluntary pay cut,” said Tom Selby, of senior analyst at investment company AJ Bell. “If you turn down the matched contribution [from an employer] you won’t get it back elsewhere.”
Why do analysts say women face tougher choices?
Women are more likely to work part-time, and typically earn less – a so-called motherhood penalty. That means the pension contribution change could have more of a noticeable impact in terms of pounds and pence.
For example, someone earning £20,000 a year will see their contribution to a pension rise from £335 to £555 a year.
But for London hairdresser Chloe Cornwall, the long-term gain outweighs any short-term financial pain.
“This is a little bit of money that goes straight out of my wages before I even see it, that is for the future when I might need it,” she said.
There has also been some criticism of the system, as many women who work part-time do not earn the £10,000 a year required to qualify for these automatic pension contributions.
That is true of Chloe’s colleague, Taneika Boyle, who said that she used to be automatically enrolled until she went on maternity leave, returned part-time, and so no longer earned enough to be included to receive her employer’s top-up too.
“Once you have a baby, you are put to the side,” she said.
Emma-Lou Montgomery, from Fidelity International, who wrote a report on the financial power of women, said: “We need a system where as soon as women start earning anything they are automatically enrolled, encouraging women to save for their futures.”
A spokesman for the Department for Work and Pensions said: “The government is committed to removing the lower earnings limit and will consult on the best approach in due course.”
But Martyn Maxey, who owns the hairdressing firm, argued that it was “too big a burden” for small businesses to cover these increasing pension contribution costs, rather than the government.
Will the pension savings amount to much?
Under the scheme, a 24-year-old earning £30,000 a year should build up a pension pot which would buy a retirement income of about £11,000 a year in today’s money, according to Mr Selby, of AJ Bell. This makes a number of assumptions, so the actual result could be significantly different.
Individuals will have a choice of various other ways to access the money at retirement, which would affect how much they get.
The final total also depends on the performance of one of a number of pension companies that hold and invest people’s savings.
But figures compiled for the BBC by data company Defaqto show a wide variation in that performance.
Over the past five years, pension pots with Standard Life have gained an average of 4.5% a year in value, compared with those with Nest – the biggest overseer of auto-enrolment pensions – which has seen an average return of 8.9% a year over the same period.
Which other tax changes take effect from now?
Various other changes to our finances come into force on Saturday – the first day of the 2019-20 tax year – including:
- A rise in the state pension by 2.6%, meaning the basic state pension for most existing claimants is £129.20 a week
- A slight rise in the amount that can be saved into Junior Individual Savings Accounts
- A rise in the threshold at which taxpayers start paying the higher rate of tax to £50,000, except in Scotland where it remains at £43,430
- State pension calculator Department for Work and Pensions
- Combined state, workplace and DC calculator, from Standard Life
- How much can I earn from a DC pot? Money Advice Service