What is auto-enrolment?
In 2012 to encourage workers to start building up retirement benefits, the Government introduced pension reforms that require all UK employers to offer workplace pension schemes and to enroll eligible workers into their schemes. These reforms have become known as automatic enrolment.
Automatic enrolment has been designed so that eligible workers who want to build up retirement savings don’t have to take any action themselves – employers will automatically enroll eligible workers into a workplace pension scheme and deduct any contributions that the member is required to pay from their wages or salary, and then pay into the pension scheme on their behalf.
Auto-enrolment has been an undoubted success. The latest government figures show that only around 10 per cent of workers currently opt-out of saving into a workplace scheme. Nine out of ten workers have chosen to remain enrolled.
Who is eligible?
To qualify to be auto-enrolled, workers must be between 22 and State Pension age (that is the age when you become eligible to start claiming your State Pension). You must also have earnings above the minimum earnings threshold (currently £10,000 a year).
The minimum requirement is for you and your employer to pay pension contributions on a band of earnings over £120 per week (£6,240 a year) up to an upper limit of £968 per week (£50,270 a year). However, your employer can offer more generous terms and apply contributions to all of your pay.
Young workers between 16 and 22 have the right to join the pension scheme but in order to qualify for the minimum employer contribution, they must earn over the lower limit of £120 per week.
The same rules apply if you are above State Pension age but younger than 75. If you do join, employer contributions can be stopped once you reach your 75th birthday.
Even if you do not automatically qualify for auto-enrolment, your employer must give you information about the pension scheme and let you know how to join.
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Contributions
From April 2019 minimum statutory contributions increased to 3% for employers and 5% for employees. Employers can offer more generous structures if they wish.
How much is enough?
The earlier you start making contributions to your workplace pension the more time your pension pot has to grow and the greater chance you have of achieving your ideal retirement income.
Many companies auto enrol employees on the minimum contribution level and then give their employees the option to “step up” and pay a higher contribution, often matched to a certain level by the company. You may wish to consider increasing your contributions to take advantage of the employer’s maximum matching rate.
If you’re not able to contribute more now, remember that you can increase your savings in the future.
Check your pension regularly
You cannot afford to ignore your pension. You should be asking yourself how much income you will need in retirement and working out whether you’re on course to meet that goal. You should do this exercise at least once a year on receipt of your annual pension statement.
Pay attention to your investments
Many investors opt for the default ‘Lifestyle’ investment option when they join a pension fund.
In a Lifestyle fund you are effectively leaving the investment decisions to the experts. They usually start by investing your money in higher risk funds like equities (stocks and shares) which are expected to produce the higher returns. As you get closer to your retirement age they will automatically switch your money into lower risk/lower return investments (bonds and cash).
The idea is to try and make sure that you have no nasty surprises as you get closer to retirement and to avoid a sudden drop in the value of your pot.
You do not have to choose the default option however and you may wish to choose an alternative range of investments that are on offer.
This can be a complex area and it is sensible to get expert advice before you make any decisions.
Why Usdaw supports auto-enrolment
Most of us are living longer lives and can look forward to a longer retirement than our parents and grandparents. The bad news is that millions of us are saving too little for our retirement and what we have saved is going to have to be stretched over a greater number of years.
Usdaw believes that all members have the right to a decent pension. If we are going to have to put money aside for retirement then we need assistance to help us build up a decent pension pot and that is why the right for workers to be put in a pension scheme automatically was introduced.
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