Pension automatic enrolment started at the beginning of October 2012 with staff who work for the biggest businesses. Firms with fewer than 50 workers will not start enrolling their staff until June 2015 at the earliest. But even the smallest employer – such as a plumber employing a full-time assistant – will eventually be obliged by law to enrol staff.
Employers are obliged to pay in as well, with the government adding a little extra through tax relief.
So who will automatically be enrolled into a workplace pension scheme?
A workplace pension is a saving scheme for retirement organised through an employer. The employer may have their own scheme, offer one from a specialist pension provider, or use a government-backed scheme.
Under the new system, those who work in the UK, are aged over 22 and under the state pension age, are not already in a scheme, and earn more than £8,105 a year will automatically be enrolled.
Part-time workers who earn less than that can ask to take part if they want to and, if they earn more than £5,564, their employer will be obliged to make a contribution too.
Those aged under 22, or over state pension age and still working, can also opt-in in the same way. Those who already save in a workplace pension scheme or are self-employed will not be signed up.
Do I have to take part?
No. You may decide that you need all of your monthly pay to make ends meet or you have a private pension policy you think is sufficient.
Staff will be given a letter about the scheme when it starts at their workplace. This will explain who the pension provider is. Workers can ask this provider for an opt-out form.
If they fill it in within a month, then their involvement will be cancelled.
If they take longer, then they will start to build up a very small pension pot. This will still exist when the opt-out is processed, but it will just sit there untouched until retirement.
It is worth remembering that by opting out, workers will miss out on the contribution their employer puts into the pension. In the majority of cases, they simply will not get these payments in any other way, such as in their regular pay.
Those who opt out will also be enrolled again every three years by an employer, or after three months at a new job, at which point they will need to complete the opt-out process again.
What it means for your pay packet
At first, an employee will only see a minimum of 0.8% of their earnings going to their workplace pension. Their employer will be obliged to add a contribution that is the equivalent of 1% of the worker’s earnings. Tax relief adds another 0.2%. However, these amounts will increase to a minimum of a 4% contribution from the employee, 3% from the employer, and 1% in tax relief from October 2018.
This means the equivalent of 8% of a worker’s earnings (including overtime, but excluding any earnings over £42,275) will go into their pension pot.
You will not be able to get at the funds until the age of 55 at the earliest so, in the meantime, the money is invested. The pension firm, insurance company, or government-backed organisation that is running the scheme will give each worker a choice on how risky they want these investments to be.
There will also be options for people to choose Sharia-compliant, or ethical funds.
There will be a default option. This generally starts very safely, tries to make a bigger return during a worker’s middle age, then plays safe again as he or she approaches retirement.
There will be a charge levied by the pension provider, which is taken automatically each year from the pot.
What sort of pension will I have at the end of it?
It is very difficult to predict what sort of pension somebody would have at the end of the process, owing to the impact of the success of investments, changes to people’s earnings and the age at which they decide to retire. However, as a ballpark figure, a 30-year-old who earns £20,000 now, sees a 1% above inflation pay rise each year, makes the minimum contributions permitted, whose investments have a small but regular return and who retires at 70 may receive a pension each year of £2,100 at today’s prices.
Experts and ministers say it is vital people make a start at an early stage in their working lives, to eventually have savings that will top up the state pension.
For further information, please do not hesitate to contact the Smart Savings team.
Information for employers – Are you ready for automatic enrolment?
You can view a very useful Webinar here https://registration.livegroup.co.uk/ae_areyouready/Downloads/
There’s also more detailed guidance for employers about the automatic enrolment process from The Pensions Regulator http://www.thepensionsregulator.gov.uk/docs/pensions-reform-automatic-enrolment-v4.pdf