In 2012 to encourage workers to start building up retirement benefits, the Government introduced pension reforms that require all UK employers to offer workplace pension schemes and to enroll eligible workers into their schemes. These reforms have become known as automatic enrolment.
Automatic enrolment has been designed so that eligible workers who want to build up retirement savings don’t have to take any action themselves – employers will automatically enroll eligible workers into a workplace pension scheme and deduct any contributions that the member is required to pay from their wages or salary, and then pay into the pension scheme on their behalf.
Auto-enrolment has been an undoubted success. The latest government figures show that only around 10 per cent of workers currently opt-out of saving into a workplace scheme. Nine out of ten workers have chosen to remain enrolled.
Since 2012 the minimum contribution level has been set at 2% with the minimum a worker must contribute set at 1% and an employer 1%.
What is changing?
In April 2018 a minimum total of 5% must be paid into an employee’s pension pot with the minimum an employer must contribute set at 2% and a worker 3% (inclusive of tax relief).
However, many members may already make pension contributions of 3% or more (and the employer 2% or more) in which case they will not see an increase in the level of their contributions or those of the employer.
Why is the minimum contribution rate increasing?
As people are generally living longer, there is increasing strain on the State benefits system, so private pension provision is becoming increasingly important.
The existing minimum contribution rate of 2% of banded earnings has been in place since 2012. The low initial level was intended to encourage employees to stay in a pension scheme and get used to the idea of contributing to a workplace pension on a long term basis. However, 2% of earnings will not provide a substantial amount of retirement income even if the individual is a member of a work place pension scheme for many years.
By increasing the contributions from 2% to 5% the Government aims to encourage employees to remain invested, provide greater retirement savings and take more responsibility for providing a pension for themselves.
What do I have to do to take advantage of the increased rates?
Your employer should advise you of the increase in your contributions (and their own) but other than being aware that your contributions will increase you need not take any action to ensure the contributions are increased by both you and your employer.
Will I still receive tax relief on the contributions I make?
Yes, if you ordinarily pay tax at 20%, every £1 you pay in only costs you 80 pence.
Who is eligible?
To qualify to be auto-enrolled, workers must be between 22 and State Pension age (that is the age when you become eligible to start claiming your State Pension). You must also have earnings above the minimum earnings threshold (currently £10,000 a year).
The minimum requirement is for you and your employer to pay pension contributions on earnings over £113 per week up to an upper limit of £866 per week. However, as mentioned previously, your employer can offer more generous terms and apply contributions to all of your pay.
Young workers between 16 and 22 have the right to join the pension scheme but in order to qualify for the minimum employer contribution, they must earn over the lower limit of £113 per week.
The same rules apply if you are above State Pension age but younger than 75. If you do join, employer contributions can be stopped once you reach your 75th birthday.
Even if you do not automatically qualify for auto-enrolment, your employer must give you information about the pension scheme and let you know how to join.
Are there any plans to increase contribution rates after April 2018?
The minimum contribution level to an auto-enrolment pension, including company and employer contributions will increase to 8 per cent in April 2019 (5% employee and 3% employer).
How much is enough?
The earlier you start making contributions to your workplace pension the more time your pension pot has to grow and the greater chance you have of achieving your ideal retirement income.
Many companies auto enrol employees on the minimum contribution level and then give their employees the option to “step up” and pay a higher contribution, often matched to a certain level by the company. You may wish to consider increasing your contributions to take advantage of the employer’s maximum matching rate.
If you’re not able to contribute more now, remember that you can increase your savings at any time in the future.
Check your pension regularly
You cannot afford to ignore your pension. You should be asking yourself how much income you will need in retirement and working out whether you’re on course to meet that goal. You should do this exercise at least once a year on receipt of your annual pension statement.
Pay attention to your investments
Many investors opt for the default ‘Lifestyle’ investment option when they join a pension fund.
In a Lifestyle fund you are effectively leaving the investment decisions to the experts. They usually start by investing your money in higher risk funds like equities (stocks and shares) which are expected to produce the higher returns. As you get closer to your retirement age they will automatically switch your money into lower risk/lower return investments (bonds and cash).
The idea is to try and make sure that you have no nasty surprises as you get closer to retirement-and to avoid a sudden drop in the value of your pot.
You do not have to choose the default option however and you may wish to choose an alternative range of investments that are on offer.
This can be a complex area and it is sensible to get expert advice before you make any decisions.
Why Usdaw supports auto-enrolment
Most of us are living longer lives and can look forward to a longer retirement than our parents and grandparents. The bad news is that millions of us are saving too little for our retirement and what we have saved is going to have to be stretched over a greater number of years.
Usdaw believes that all members have the right to a decent pension. If we are going to have to put money aside for retirement then we need assistance to help us build up a decent pension pot and that is why the right for workers to be put in a pension scheme automatically was introduced.
The increase in pension contributions in April 2018 (and then in 2019) will provide an opportunity for employees to save more and take advantage of compulsory employer contributions along with the tax relief on your contributions and savings.
We realise that some workers may find it difficult to pay an increased pension contribution rate. If you are considering opting out please take time to read the Usdaw leaflet entitled: 10 Reasons not to opt out.