Auto-enrolment: what you need to know
Auto-enrolment was introduced in October last year to ensure workers have access to an occupational pension.
As a population, we are living longer but not saving enough; recent figures from the Office for National Statistics show private pension membership is at its lowest level since the 1950s.
The Government hopes auto-enrolment will encourage more people to set money aside for their later years to alleviate the pressure on the state.
If you’re still unclear about how auto-enrolment affects you, we reveal the answers to the most frequently asked questions:
Who will this affect?
Employers will automatically enrol workers into a workplace pension who:
• are not already in a qualifying pension scheme
• are aged 22 or over
• are under State Pension age
• earn more than £9,440 a year (this figure is reviewed every year), and work or usually work in the UK.
Why is this happening?
Millions of people are not saving enough to have the income they are likely to want in retirement.
Life expectancy in the UK is increasing and at the same time people are saving less into pensions.
In 1901 there were 10 people working for every pensioner in the UK. In 2010 there were 3 people working for every pensioner. By 2050 it is expected that this will change to just 2 workers.
When does it start?
The date workers are enrolled depends on the size of the company they work for and is being rolled out over the next six years.
• Large employers (with 250 or more workers), will have to start automatically enrolling their workers from October 2012 to February 2014.
• Medium employers (50 – 249 workers) will have to start automatically enrolling their workers from April 2014 to April 2015.
• Small employers (49 workers or less) will have to start automatically enrolling their workers from June 2015 to April 2017.
• New employers (established after April 2012) will have to start automatically enrolling their workers from May 2017 to February 2018.
• Employers who chose to use Defined Benefit or Hybrid Schemes can delay their staging date until 30 September 2017.
How much will it cost me?
Most people will be automatically enrolled into a Defined Contribution scheme or money purchase scheme. This means that all the contributions paid into your pension are invested until you retire.
The amount of money you have when you retire depends on how much has been paid in and how well investments have performed. In most schemes when you retire you can take some of your pension as a tax free lump sum and take the rest as a regular income.
The Government has set a minimum amount of money that has to be put into a Defined Contribution scheme by employers and workers, this starts low and increases gradually over a number of years.
Any worker earning over £8,105 a year (this figure will be reviewed every year) will be automatically enrolled into a workplace pension by their employer. The minimum percentage contribution will be made on anything the worker earns over £5,564 up to a maximum limit of £42,475 (both these figures may change).
The figures below give details of the set minimum percentage that has to be contributed in total to Defined Contribution schemes. This means the worker’s contribution, the employer’s contribution and tax relief added together:
1 Oct 2012 to 30 Sep 2017 – 2%
1 Oct 2017 to 30 Sept 2018 – 5%
1 Oct onwards – 8%
Can I opt out?
Yes. If you opt out within one month from the day you officially become a member of the scheme, it will be as if you were never a member of the pension scheme and any payments made by you to your pension will be refunded.
If you choose to opt out after this period, depending on the scheme, the payments already made may not be refunded and will remain in your pension scheme until you retire.
If you opt out or stop paying into the workplace pension your employer has a duty to automatically enrol you back into your pension scheme at regular intervals, usually every three years. This is to give you the opportunity to reconsider your finances and pension saving options. You can choose to stay in this time or opt out again.
I am an employer. How will it affect me?
For the first time employers are required by law to automatically enrol all eligible workers into a workplace pension and make a contribution to it.
The Pensions Regulator is responsible for ensuring employers comply with the new law and have produced guidance to help employers to do this.
It will write to each employer before the date they are required to start enrolling workers into a workplace pension, and depending on employer size, on at least one other occasion.