Most of us are not saving enough for our retirement, and many are not saving anything at all.
To combat low levels of pension participation and the rising cost of people living longer, the government is introducing new pension duties for all employers.
These duties are referred to as pension auto enrolment. Here we explain what this entails for employees.
Don't understand all the pension terminology? Read our pensions jargon buster.
What is auto enrolment?
If you tried to survive on the State pension alone when you retire, you would probably experience a significant drop in your standard of living.
The current basic state pension of £113.10 per week is likely to be far below what most of us would need in order to maintain a good standard of living in retirement.
The problem is few of us want to spend time thinking about our retirement – which may be many years away, especially when we have other more pressing financial matters to take care of, such as paying off a credit card bill or mortgage.
Unfortunately, it is all too tempting to put thoughts of setting up a pension to the back of one’s mind, resulting in delay or, even, completely forgetting about it until it’s too late.
To help people avoid spending their retirement in financial hardship and to get them into the saving habit, the government has introduced a new law which obliges employers to automatically enrol all eligible staff in a workplace pension.
The programme of auto enrolment began in 2012 and is being phased in over a number of years. The actual start or ‘staging’ date depends on the size of the firm.
All large employers (with over 250 employees) will have already met their staging dates. Now it’s the turn of medium-sized companies. By 2018, all employers – both big and small – will have become subject to the new rules.
Could you boost your income by deferring your state pension?
Who will be auto enrolled?
Your employer will be obliged to enrol you in a workplace pension by their staging deadline if you are aged between 22 and the State pension age, work in the UK and are earning more than £10,000 a year.
Those who are employed on a short-term contract, paid via an agency or on maternity, adoption or carer’s leave will also be eligible for auto enrolment.
You won’t need to do anything if your employer has not informed you about auto enrolment. You’ll be told about it when, and if, you are eligible to be enrolled.
You are also not likely to notice any change if you’re already a member of a workplace pension scheme, as long as it meets certain minimum standards.
What are the benefits of auto enrolment?
The greatest benefit of auto enrolment is that your employer will pay into your pension. Initially, you will contribute a minimum of 0.8% of your gross salary, while your employer will contribute at least 1%, plus you’ll get 0.2% in tax relief – that’s 2% of your gross annual salary going towards your retirement fund.
Let’s say you earn £35,000 a year before tax, this would mean you contribute £19.49 a month, your employer would contribute £24.36 and you’d get a further £4.87 in tax relief. This totals £48.71 a month, or £584.56 a year.
The minimum contribution limits will rise steadily over the next few years, so that from October 2018 they will amount to 8% of your gross salary. This comprises a minimum employee contribution of 4%, a minimum employer contribution of 3% and tax relief of 1%. This would see your total annual pension contribution increasing to £2,338.24 a year, if you are earning £35,000 gross.
As your contribution will rise gradually and is taken automatically out of your gross pay, hopefully you’ll hardly notice the small dip in your take-home wage. You should also reap the benefit when you retire.
Can I opt out of auto enrolment?
For most people, auto enrolment is a sensible idea and should be welcomed. But if you’re in debt, it may be better to clear what you owe before you think about saving in a pension.
You can opt out of auto enrolment at any time. If you do this within a month of being enrolled, any payments you’ve made will be refunded. After a month your payments are not refundable, and will stay invested in your pension until you retire. It’s worth noting that if you do opt out – perhaps to sort out your personal finances – you can re-enrol at any time.
Do note that your employer will be legally required to re-enrol you in their workplace pension scheme every three years, providing you still meet the eligibility requirements.
Still not sure about pensions? Read our guide to the different types of pension available.