As an estimated 800,000 small businesses, prepare for their auto-enrolment staging deadline this year, we explain what you need to know about this Government-managed initiative to help workers save more for retirement.
What is auto enrolment?
For decades, many companies have offered employees what is known as a workplace pension, where both they and the employee make regular contributions to a pension pot.
The thing is, it has never been compulsory for a company to do this, and even when a workplace pension has been on the table, employees have had to opt in rather than opt out. This last point is a big deal because we are not usually great at opting into things, even if we know that doing so is in our best interests. As a result, lots of people have missed out on the benefits a workplace pension can deliver.
This is all changing. New legislation means that by February 1, 2018 every company in the UK must have a workplace pension scheme in place and have automatically enrolled (opted in) every eligible employee.
What if you don’t want to be auto enrolled?
If you are eligible then your employer must automatically enrol you into its workplace pension scheme. Don’t worry, you can opt out straight away, if that’s what you want to do.
Are you eligible?
Generally, you are eligible if you're 22-years-old or over, not receiving the State Pension, earning at least £10,000 per year and working in the UK under a contract of employment.
You might find that you are already part of a workplace pension scheme that meets the minimum requirements of the new auto enrolment initiative. If that’s the case, you will probably not be opted in to any new auto-enrolment scheme.
Why is auto enrolment happening?
Quite simply, the government is concerned that people are not going to have the money they need when they retire. This problem will only get worse as increasing life expectancy puts more pressure on the State Pension.
Hence, auto enrolment has been introduced to encourage more people to save money into private pensions from an earlier age.
What could it mean for me?
There are two big pluses:
- First, being part of a workplace pension scheme essentially means free money for you. As well as you putting money into a pension, your employer must also contribute. It’s like having a pay rise, with the money put aside for you to enjoy later in life.
- Second, for every penny you contribute, the government will give you tax relief based on your income tax bracket. Let’s say you are a basic-rate taxpayer (20 per cent). For every £80 you put into your pension, the government will top this up to £100. Of course, tax treatment depends on your individual circumstances and could be subject to change.
How much money will you and your employer have to contribute?
As of March 2017, an employee must put in at least 0.8 per cent of their qualifying earnings and the employer must add another 1 per cent. These minimum rates will gradually increase over time. And it’s not unusual for an employer to contribute more than the minimum rate, sometimes a lot more.
It’s worth checking the Pension Advisory Service website for more information on contribution rates and how they're calculated based on your earnings.
What happens if you have one or more other pensions?
Auto enrolment relates specifically to your current employer. If you are not already a part of a scheme with them that meets the minimum requirements then you should be automatically enrolled into a new workplace scheme. You are entitled to benefit from this scheme regardless of what other private or company pensions you have.
What if you have more than one job?
If you meet the eligibility criteria for every current job that you have, then each of your employers should enrol you in their specific workplace pension scheme. Once you leave a company your employer will no longer have to make contributions on your behalf. The scheme may allow you to continue making contributions, if you wish. Or, you might be better off transferring your pot of money to another pension.
What if you are thinking of retiring in the next 10 years?
It’s not unusual for people in this position to think it’s too late for them to make a difference when it comes to their pension. The simple fact is, 10 years is a long time, especially in the world of pensions.
Every penny you can put away between now and retirement could make a significant difference to how you live your life. And if you remain opted into a workplace scheme there’s the bonus of effectively receiving free money, from your employer and the government.
What’s happened to all the big, juicy pension schemes companies used to offer?
This is a bit of an elephant in the room. Not so long ago a lot of companies offered pensions with very generous benefits, including substantial guaranteed incomes for life.
As the population grows and life expectancy increases these sorts of schemes are coming under increasing pressure, with more and more companies changing the terms or phasing them out for new employees. Basically, they can’t afford to offer them anymore.
Where to go for more information
Your employer should know their specific obligations to you with regards to auto enrolment into their workplace pension scheme. And two great starting points are The Pensions Advisory Service and the government website.
Thanks to pensions specialist Portafina.
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