Life of a pension saver part 1: auto-enrolment
It is said often enough to count as a cliché it’s never too early to start a pension. Like most clichés, it rings true; however it also clashes with the pragmatic truth that for most people there is a time when it just feels too early to start thinking about pensions.
How can someone be expected to think about funding their retirement when they are desperately saving for driving lessons, a first car, or simply trying to minimise student debt?
The problem is that following the days of Saturday jobs and summer placements we begin full-time work and with this new financial needs immediately emerge. After a house deposit, a wedding fund, child care and other day-to-day expenses are considered, saving for a far-off retirement can seem like an optional, luxurious extra.
Once in that mind-set, it is difficult to find a good time to begin saving. Evidence and anecdote suggest that by the time many people start to think seriously about their retirement, they have yet to save any money in a pension.
The introduction of auto-enrolment
Thanks to auto-enrolment, starting to save into a workplace pension has never been easier. Auto-enrolment legislation requires employers to provide a pension scheme for its employees, which must meet certain minimum standards. If an employee is age 22 or over and earning at least £10,000 a year the employer must automatically enter them in the scheme and contribute to the employee’s fund.
This means many young people will begin saving when they start their first full-time job and pension contributions will seem as commonplace as income tax and National Insurance. These employees, known as ‘eligible jobholders’, have to actively ‘opt out’ if they do not wish to save. Employers are then required to re-enrol eligible jobholders every three years meaning employees will have to repeat this process if they want to stay out of the scheme.
Auto-enrolment is a huge undertaking and it is being introduced over several years. The largest employers became subject to the rules in October 2012 and by October 2018 all employers will need to comply. The minimum contribution level is also being phased in. By October 2018 the total minimum contribution will be 8% of an employee’s ‘qualifying earnings’, of which at least 3% must come from the employer. Auto-enrolment is very much in its infancy but early figures suggest that there are already millions of new pension savers across the UK.
Auto-enrolment has the power to be a hugely beneficial influence on the UK’s attitude towards, and awareness of, retirement planning. Those who opt out will at least be making an active choice based on their circumstances. People who were previously offered the choice to join their employer’s scheme, possibly with little supporting information, will now receive a much clearer message: you should only opt out if you have to, this is the minimum amount you should be saving, and your employer will support you. The introduction of auto-enrolment highlights how high a priority pension saving should be.
Contributions and benefits
For first time savers their pension scheme annual statement may be their first glimpse of the correlation between contributions, fund size and pension benefits. Pension schemes provide annual statements to each scheme member and included in this is a projection of what a fund might be worth in the future (based on assumptions about investment growth, fees and contributions), and what this might provide in terms of pension benefits. For many it could be an unpleasant shock. After all, industry commentators have already suggested that the minimum contribution levels are too low to support most people’s idea of a comfortable retirement.
Even so, this does not have to be viewed in a negative light. Whether or not the minimum mandatory contribution level is raised, countless more savers will at least be aware of the need to increase their contributions and better understand the benefits of doing so as soon as possible. Those who cannot afford to increase contributions until later in life will still have the advantage of having started to build a pension, where previously they may have been starting from scratch. For many auto-enrolment will be an invaluable first step towards retirement saving.
Jessica List is a pensions analyst at Suffolk Life
Click HERE for part 2 which looks at the benefits of consolidating your personal pensions.