How Will Pension Auto-Enrolment Work?
With life expectancies continually rising there are fears that many of us are not setting enough to see us through our post-retirement lives. To try and ensure that people won’t come to the end of their careers with insufficient savings to get by, the government are introducing auto-enrolment pensions.
As the name suggests, auto-enrolment pensions will be started automatically and everybody between 22 and state pension age will be eligible as long as they’re earning more than £8,105 a year.
These pensions will consist of contributions from the holders earnings, contributions from the employer and, as with other kinds of pension, you’ll get tax relief on your savings, which, by the time you cash in your pension, will form a substantial part of the pot.
At the moment at least 2% of an employee’s earnings must go into the scheme (with at least half of that coming from the employer). By 2018 this figure will be 8% and will be made up of 1% tax relief, 3% employer contributions and 4% from the employee.
These percentages only apply to earnings over a threshold of £5,564 and under £42,475 (anything you earn above that you can do with as you will.)
Though such pensions will be set up automatically, they are not compulsory. You can choose not to have one if you’d rather make alternative arrangements, though you may well be losing out on mandatory contributions from your employer that could potentially leave you worse off. To do so you’ll need to fill in an opt out form within one month of being enrolled.
It is illegal for your employer to encourage you to opt out of the scheme in any way and they can face hefty fines if they refuse to enrol you as they should.
If you aren’t eligible for automatic enrolment you can still choose to join the scheme. As long as you’re over 16 and under 75 you can ask your employer enrol you. If you earn above £5,564 a year they will also have to make contributions to your pot. If you earn less than that, they still have to enrol you, but they won’t have to contribute.
When Is Auto-Enrolment Coming In?
This depends on the size of the company. Any company with more than 120,000 employees already had to comply by October by 2012, and those employing more than 50,000 had until November of that year.
A company with more than 250 workers will have until February 2014, whilst those with 50-249 staff have until April 2015. At other end of the spectrum, the smallest of employers will have until April of 2017 before they have to begin with auto-enrolment.
Unless they have a preferred pension provider they want to use instead or alongside it, many employers will use the newly set up NEST (National Employment Savings Trust) pension scheme to fulfil their duties.
With NEST savers have the option to leave their fund to be managed on their behalf, or they can take control, alter their contribution levels and switch funds. Nest also make it easy for savers to keep track of their account online 24/7.
NEST offers another advantage for savers in that, if you switch jobs to another employer also using NEST you can continue to pay into the same pot and keep your account as before without having to transfer your pot.