We're all being urged to plan for our retirement, but unfortunately not everyone gives it the attention it deserves. Well, times are changing, and auto-enrolment is the latest Government scheme aimed at tackling the pensions crisis to get people saving for their golden years.
But just what is auto-enrolment, and what does it mean for you? We've put together a quick guide to answer these vital questions so you can look to the future with confidence.
Auto-enrolment is a Government initiative where all workers will be automatically enrolled into a workplace pension. The employers themselves will be responsible for arranging a suitable scheme (they could have their own pension, they may offer one from a specialist provider or they may use a Government-backed scheme instead), with employees of all kinds gradually seeing a portion of their pay packet being diverted into their pension pot. Back to Top
Anyone who meets the following criteria will be automatically enrolled:
This means that a large proportion of UK employees will be signed up – millions already have been – and even if you don't meet the criteria, you can still opt-in should you wish. This applies to part-time workers who perhaps earn less than the threshold (and if they earn over £5,824, their employer will have to make a contribution too), as well as those who are under 22 or over state pension age but still working. Back to Top
Basically, a proportion of your eligible earnings will go into your pension pot each month, which will be topped up by your employer's contribution as well as Government tax relief. Over the next few years the minimum contribution amounts will start to increase, but currently the minimum amount an employee will pay into their pot will be 0.8% of their own earnings, topped up by their employer's contribution of 1% (of the employee's qualifying earnings) and a further 0.2% in the form of tax relief.
By 2018 the minimum contributions will rise to the equivalent of 8% of a worker's earnings – this will be made up of a 4% employee contribution, 3% from the employer and 1% from tax relief.
However, that's not the whole story. Your money won't just be sitting there idly – most pensions are known as "defined contribution" schemes, which essentially means that your pension is an investment and that your money will actually be working for you. The pension provider will usually give you a choice of how risky you want your investments to be, and the final value of your pension pot will often be determined by how successful they were. Back to Top
How much you'll save will depend on your salary and the specific scheme you've been signed up to, and although minimum contribution levels have been set, there's nothing to say that individual schemes or even personal choice can't increase those levels for a bigger final pot (just bear in mind that most schemes will take a small percentage of your annual savings as a management fee, too). Back to Top
Some employees might already have noticed money coming out of their pay packet. The biggest companies (those with more than 120,000 staff) started the process in October 2012, while smaller companies will gradually get in on the action by 2018. Firms with fewer than 50 members of staff started to get things underway in 2015, but by 2018 the smallest employers – even a two-person set up – will be obliged to have a scheme in place. Back to Top
The days of people staying in one job for their entire working life seem to be a thing of the past, and that means you may be wondering what would happen to your pension fund should you change jobs. Luckily, there's no cause for concern – your pension is yours and the money will still be invested until you reach retirement, and once your company has auto-enrolled you into a new pension scheme there are usually a couple of options for you to consider:
Make sure to discuss the options with your pension provider. Back to Top
Yes. If you perhaps need your whole pay packet to pay bills or have a private pension scheme you think is sufficient, you can always ask for an opt-out form. If you do so within one month of being enrolled, your involvement will be automatically cancelled, but if it takes longer, you'll start to accrue a small pension pot, which you won't be able to touch until retirement. You'll be automatically re-enrolled every three years so will need to go through the process again should you wish to remain out of the scheme.
It's worth noting, however, that opting out means you're effectively missing out on money being given to you by your employer. You wouldn't get those contributions any other way and almost certainly wouldn't get them through your regular pay, so it's often financially worthwhile to stay enrolled.
Remember that it pays to start saving early to give you time to accumulate a larger pot by the time you retire.
Disclaimer: This is a basic guide to auto-enrolment and does not cover every circumstance. The information it contains is correct as of April 2016. Some of the information may become inaccurate over time, for example because of changes to the law. Back to Top
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Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.
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