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The ‘Auto Enrolled’ Pension Solution

 Soon All British Employees Will Have A Pension

In a bid to ensure more people, including those on lower incomes, save for their retirement the government’s ‘auto enrolment’ pension scheme is being rolled out to more and more employers of all sizes. Previously, not all employers necessarily offered a pension scheme, but under regulations initiated in 2010, they now have to.

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What Is ‘Auto Enrolment?’

It’s a system where every employer must enrol workers into a workplace pension scheme assuming they fulfil the following criteria:

  • They are aged between 22 years and the State pension age
  • Earn more than £10,000 per year
  • Work in the UK

A ‘workplace pension’ such as that provided by auto enrolment can be called ‘works’, ‘occupational’, ‘company’ or ‘work-based’ – all terms used by companies and organisations already providing such schemes to their workforce.

Employers not offering a pension scheme previously will have to set one up by their ‘staging date’ – a deadline based on their number of employees (see the 2016 auto enrolment timetable).

How It Works

A percentage of an employee’s pay is put into the pension scheme when they’re paid, and in many cases the employer also pays money into it – and the government effectively make a contribution in the form of tax relief.

Who It Applies To

Employers – depending on their size – have been gradually brought under the terms of auto enrolment. Employees can find out when they’ll be auto enrolled by visiting the staging date calculator. It’s designed for employers, but employees can use it too.

It will eventually apply to all sizes of company – even someone like a plumber employing a single plumbers mate will have to enroll them.

Does Everyone Have To Take Part In Auto Enrolment?

All employers will eventually have to, but employees can opt out if they feel they need more of their salary to support themselves or they have an existing private pension they feel is sufficient for their requirements.

Employees can ask for an opt-out form when their employer starts auto enrolment or, if they’re already in a scheme, leave it. After three years they’ll be enrolled again, so would need to do another opt-out, if desired.

Changing Jobs

Workers changing jobs have two options:

  • Continue paying into their previous employer’s scheme
  • Combine the old and new schemes

It’s worth employees checking with the pension provider before making a decision; for example, some pension benefits may not apply to those no longer contributing to the scheme. Also, if they’ve worked for less than two years before leaving, it may be possible to receive a refund of contributions paid so far.

Stopping Work Or Becoming Self-employed

It may be possible to continue paying into the previous employer’s scheme, or use NEST (see below) – a government workplace pension scheme that the self-employed and sole directors of limited companies can use.

NEST (National Employment Savings Trust)

This has been set up by the government especially for auto enrolment thus giving employers and employees access to a workplace pension scheme that complies with the pension rules.

How Much Is This Scheme Worth?

By 2018 the contribution amounts will be 4% of their pay from the employee, 3% from their employer and another 0.2% coming from tax relief.

So as an example, an employee earning £20,000 per year would have £96.24 going into their pension fund with £48.12 of this coming from their ‘take home’ pay.

Working out how much that would provide someone in retirement is difficult to predict because variables apply such as:

  • Changes to individual employee’s earnings during their working life
  • The performance of the investments made on their behalf by the pension fund managers
  • The age the employee retires (they can access the funds once they reach age 55)

As a very rough guide, assuming an employee works until age 70, receives pay rises 1% above inflation through their working life, and the investments made on their behalf with the pension contributions perform moderately well, they may end up with an income of around £2,000 per year.

Criticisms

Some commentators say this scheme won’t provide a pension that people can live on in retirement, but others point out that at least it gets people in the savings habit and can be augmented by other saving schemes in parallel.

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