16th September 2015 at 4:25pm
The law on workplace pensions has changed.
To make it easier for millions more people to build up a pension it’s now become law that all employers have to put their workers into a pension scheme. And rather than having to actively choose to join a pension scheme, you’ll now be automatically enrolled in a staff scheme as a matter of course.
The reason for this new legislation is that as a nation we’re not saving enough to have the income we are likely to want in retirement. We can’t rely on just the state pension to give us a comfortable retirement; we need to take control ourselves.
With life expectancy in the UK increasing, meaning we could be spending longer in retirement than ever before, it’s never been more important to save as much as we can for as long as we can.
The good news is that so far auto-enrolment has proved a big success; with very low opt out rates. And it’s had a particularly high take up amongst young people, which is a very positive sign, with many seeing it as free money from their employer and from the tax man.
As this could potentially affect many of us, we thought it would be helpful to give you some information on the whys and what ifs of auto-enrolment with our quick Q&A and handy links on where to go to find out more.
Why have I been enrolled in a workplace pension?
If you earn over £10,000 per year, are aged 22 or over and are under state pension age you’ll now be auto-enrolled, it’s the law.
How do they work?
It’s simple, a percentage of your pay is put into your company pension automatically every payday. In most cases, your employer also adds money into your pension scheme for you, and you get a top up (known as tax relief) from the government of up to 25% depending upon the type of scheme. That’s the free money we were talking about earlier.
What if I don’t want to join the scheme?
If you don’t want to join the scheme you need to opt out, you can do this within a one month period after you started. You‘ll usually receive documentation from your company explaining this and giving you details on what to do.
And you’ll need to make sure you do this within a one month period if you want to receive back the money you have paid in.
What if I opt out of a scheme but then change my mind in the future?
It’s OK, you can opt back in at any time but you’ll need to do this in writing to your employer. They don’t have to accept you back into their workplace scheme if you’ve opted out in the past twelve months.
If I want to stay in the scheme do I have to pay in?
The government sets minimum levels that need to be paid into your pension and your employer will let you know what, if anything, you have to pay. Your employer has to pay some of this minimum contribution, if they don’t pay all of the minimum contribution you’ll need to make up the difference.
For example if your employer pays the minimum amount allowed by the government, how much you need to pay will look like this:
You’ll pay 0.8% of qualifying earnings* and your employer will pay a further 1%, with the tax man topping that up with 0.2%, giving you a total pension contribution of 2%.
*For the 2015/16 tax year this is everything over £5,824 and up to £42,385.
Will this amount change?
These minimum levels are set to increase between now and 2018. Again how much you pay will depend on how much employer chooses to pay. However 2018 minimums will look like this:
You’ll pay 4% of qualifying earnings and your employers pays 3% of qualifying earnings with a tax man contribution of 1%, giving you a total contribution of 8%.
But it’s worth keeping in mind that paying the minimums might not help you get the retirement you want, additionally many employers increase their contributions in line with yours. Meaning the more you pay the more your employer pays too.
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The information in this blog or any response to comments should not be regarded as financial advice. Pensions are investments and their value can go up or down and may be worth less than you paid in. Laws and tax rules may change in the future. The information here is based on our understanding in September 2015. Your personal circumstances also have an impact on tax treatment.