As has been widely reported, there’s been a problem with UK pensions for many years. Outside the public sector not enough people are saving enough money for their retirement – and next month the latest attempt to solve the problem begins.
Various Governments over the years have tried various methods to persuade us to save more for our retirement – and none of these attempts have really worked. Now the Coalition Government is to take it one stage further: for the first time there will be Auto Enrolment in company pension schemes – meaning that an employee does not have to make a conscious effort to join a pension scheme.
From 1st October this year the largest firms (those with more than 120,000 employees) must comply with the ‘auto-enrolment’ rules. In practice, there will be virtually no firms of this size without a pension scheme, but the important thing is that the countdown has started. Gradually all firms will be included, and by April 2017 every firm currently trading must comply with the legislation.
What does this mean to you if you are an employee? Are all your pension problems over? Does auto-enrolment mean that you can sit back and look forward to a life of luxury? Unfortunately, the answer is almost certainly ‘no.’ The key driver behind auto-enrolment – at least initially – is to get people to contribute to their pensions and to make sure that as many firms and employees as possible are ‘in the net.’ But far too many people will settle for the minimum contribution levels demanded by the legislation, which won’t come anywhere close to providing a decent pension.
From October 1st you’ll be eligible for auto-enrolment in a pension scheme if you meet the following criteria:
- You’re 22 or over
- You earn more than £7,475 per annum
- You’re not already in a company pension scheme
- You work in the UK
- And you’re under the state retirement age
Assuming you meet those criteria then you’ll be automatically enrolled in your employer’s pension scheme. Typically this will mean a scheme from a pension provider (a company like Standard Life or Aviva, for example) but if your employer chooses not to use such a scheme, then you’ll be enrolled in the Government’s new National Employment Savings Trust (NEST). Once you’re enrolled in a scheme you can opt out, but you must make a conscious decision to do that.
Pension contribution levels will initially be low. From 2012 to 2016 the minimum level of contribution will be 2% of salary – made up by a 1% contribution from the employer, a 0.8% contribution from the employee and 0.2% tax relief on the employee contribution.
As we’ve already said, these levels of contribution won’t provide the average employee with an adequate pension in retirement, and although levels of contribution are set to rise from October 2016 they still won’t approach the levels of contribution seen in the public sector.
So here are three tips to help you make the most of your pension if you’re an employee and you find yourself ‘auto-enrolled’ in a pension scheme:
- Don’t settle for the minimum contributions: contribute as much as you can comfortably afford as that will boost your eventual pension fund
- Try and make these contributions from an early age – that way, they’ve got more time to grow
- And take advice on your pension, ideally from a good independent financial adviser. He or she will help you understand the levels of contribution you will need to make to get the income you want in retirement.