The law on workplace pensions is changing and as the government campaign to raise awareness of auto-enrolment states – “We’re all in”. By October 2018 every eligible employee will be part of a workplace pension provided by their employer.
- What does this mean for you?
- How will this affect your lifestyle?
- Is the auto-enrolment scheme enough to make sure you’re comfortable in retirement?
What Does Auto-Enrolment Mean? If you:
- Are 22 or over and not of state pension age
- Earn £9,440 or more per year
- Work in the UK
You will be deemed to be an eliglble jobholder and automatically enrolled into a workplace pension scheme. All employers will now have to provide a suitable company pension to you and pay a minimum amount into it on your behalf. How Much is Going in? The amount that goes into your workplace pension can be based on a percentage of your pre-tax ‘qualifying earnings’. Qualifying earnings are any amount of pay you earn between £5,668 and £41,450. Your minimum contribution is 0.8%, but will rise to 4% by 2018 Your employers minimum contribution is 1%, but will rise to 3% by 2018 Like all other pension schemes, the government will also pay into it in the form of tax relief. It doesn’t sound like much, but it really makes a difference. Here’s how:
- Basic rate taxpayers – Every £80 of your contribution will be topped up to £100
- Higher rate taxpayers – Every £60 your contribution will be topped up to £100
- Additional rate taxpayers – Every £55 your contribution will be topped up to £100
Tax relief will contribute 0.2%, going up to 1% by 2018. For example:
- You have an annual of £18,000 salary
- Your qualifying earnings are the £18,000 less £5,668, so £12,332
- At the 0.8% rate you will pay £8.22 a month, with tax relief of £2.06, and at 1% your employer will pay £10.28
- In total a contribution of £20.56 per annum will be made on your behalf in return for your contiribution of £8.22
Is This Enough? Many people come to retire mostly relying on their state pension, with either little or nothing in terms of company and private pensions. For those people, auto-enrolment is definitely a small step in the right direction. Pension experts have suggested the scheme is a very small step towards trying to address the growing shortfall of private pension provisions within the UK. The scheme isn’t how much the government recommends you should save to provide a reasonable income in retirement. It is based on an affordable level that will hopefully keep employees in the workplace pension and continue contributing. Many people could be left disappointed with the size of their pension fund and the income it will buy if they only contribute the minimum amount. When it comes to planning for your retirement, people need to work out what their options are. As well as the state pension and company pension schemes, there are also personal pension products. These include stakeholder pensions, and for those able to take a more hands on approach to investments, the Self Invested Personal Pension (SIPP). For more information on your retirement options please contact one of our advisers to receive a copy of our free retirement options guide.