18th November 2015 at 7:00am
The great pensions experiment – automatic enrolment into workplace pensions – has just turned 3 years old.
To make it easier for millions more people to build up a pension, October 2012 saw it 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, everyone would now be automatically enrolled in a staff scheme as a matter of course.
The good news is that three years on it 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, on top of what they pay in.
Bridging the savings gap
One of the main reasons for this 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.
And this introduction of auto enrolment should be a “watershed moment” in plugging the savings gap in the UK, according to the Association of British Insurers (ABI).
A report from the ABI, Time to Act: Tackling our savings problem and building our future, claims that the workplace will play a vital role in tackling Britain’s ailing savings culture in the future.
It found that delaying starting to save into a pension by five years could reduce a final pension by as much as 17%.
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.
So far, over five million people have been automatically enrolled, and less than 10% have chosen to opt out; it’s not compulsory for employees to stay in, but most do. Estimates suggest there are as many people again to be enrolled over the next three years.
Contributions start low – around 1% from the employer and 1% from the employee, with a subsidy from the Government in the form of tax relief. They will increase to 3% from the employer and 5% from the employee by 2018.
Broadly speaking, if you work for a company with more than about 50 people employed, it will probably already have a pension scheme in place and a duty to put eligible employees into it. Those working for smaller companies may have to wait a little longer, but the pension scheme will be there at some point between now and 2018.
Stay in the game
Although everyone is entitled to opt out, the Government is hoping people don’t and that by 2018 around ten million more people will be saving for retirement.
So it’s pleasing to see the success of auto enrolment, especially with the ‘millennial’ generation – those born between the early 1980s and around 2000.
By encouraging the younger generation to start saving earlier it can take the pressure off how much they need to save later, once the bills start mounting up.
And it’s reassuring that it’s the merits of saving into a pension rather than just lethargy that appears to have kept people opted in. They understand the benefits.
Here’s what those benefits can mean for you:
The auto enrolment rules require your employer to pay in as well, but only if you don’t opt out. So if you stay in the pension, your employer has to pay something in too which is where the free money comes in. If you decide to opt out, you probably won’t get extra pay instead so that benefit is lost.
When you pay into a pension, you normally get tax breaks on the way in. The most common structure for new pension schemes means that for every payment you make, the taxman adds another 25% into the pension as well.
And don’t forget 25% of the pension pot built up is tax free when you come to take benefits.
And the pension pot is available to your family on death, and under certain circumstances can be inherited free of tax.
A savings revolution
Saving can actually feel just as good as spending. With initiatives like auto enrolment making pensions more accessible and mainstream, we are developing a new savings culture and, as result, hopefully going some way to bridging that all too apparent savings gap.
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The information in this blog or any response to comments should not be regarded as financial advice. A personal pension is an investment and its 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 October 2015. Your personal circumstances also have an impact on tax treatment.