As an employee you may be wondering what all the hype is surrounding auto-enrolment. In a nutshell all employers across the country, regardless of size, will have to set up a compulsory workplace pension scheme into which to automatically enrol all eligible employees. Employees will usually be required to make contributions.
The answers to some of the more common questions employees have are given below:
Why should I do this?
Currently only 11% of employees save into a workplace pension. However with the state pension providing only £144 a week (£624 per month) from 6th April 2016 it is essential that more people start saving for their retirement if they wish to enjoy a moderate lifestyle once they retire. The majority of people need approximately two thirds of their pre-retirement income in order to have a relatively comfortable lifestyle. For someone earning £25,000 p.a. that means your total pension income would need to amount to £16,666 p.a. – leaving you with a £9,178 p.a. shortfall to fund yourself.
How much will it cost me?
Contributions for auto-enrolment will typically start at 1% of your salary; increasing to 3% in October 2017 and then 5% in October 2018. As employees will be entitled to tax relief (20% for basic rate tax payers) this means the amount actually deducted from your net salary will be slightly less than the percentages above. For example a 5% contribution would reduce your net salary by4%. For someone £15,000 p.a. this would work out as £62.50 gross reducing to £50 per month net of basic rate tax. These are the minimum contributions due and you can pay more if you wish.
I have my own private pension, should I bother with auto-enrolment?
Having your own private pension should not deter you from been auto-enrolled. The benefit of auto-enrolment is that your employer is contributing to your pension in addition to your own contributions. Provided it is affordable for you to pay the auto-enrolment contributions in addition to your existing contribution, then auto-enrolment can be a very attractive option. If the additional cost is not affordable it may be sensible for you to reduce the contributions into your own pension plan so that you can benefit from the employer contribution available via auto-enrolment. You may wish to seek independent financial advice on this matter.
What if I’m a member of my company’s existing Group Personal Pension (GPP)?
Some companies will already have a GPP in place which you may be a member of. If this is the case you may not be affected by auto-enrolment at all as your employer may just have to make some adjustments to ensure their existing scheme complies with the new legislation. If they do have to change the scheme then possible you be able to transfer your old pension to the new scheme, but you should normally only do so after taking independent financial advice
Can I choose where my money is invested?
Yes. The majority of employees will have their pension fund with the National Employment Savings Trust (NEST) has a range of funds which investors can select from. When your employer sets up auto-enrolment via NEST you will be invested within a default fund linked to your retirement date. As you approach your retirement date the fund will automatically be exposed to less investment risk. If you wish to invest your money in a different manner then you may choose an alternate fund including ethical and Sharia funds.
Can I increase my contributions if I want to pay more than the minimum?
Yes. The idea of auto-enrolment is to help encourage you into putting money aside for your future retirement. The more you contribute the more enjoyable your retirement will be. If you wish to increase your contributions let your employer know.
What if I move jobs before I retire?
If you leave your current employer then your contributions from them will cease. If you start a new job and your employer uses NEST then you can continue contributing into your previous NEST pot, if applicable. If they don’t use NEST and you continue with auto-enrolment then your contributions will be paid to the provider of choice. It may be possible to transfer your NEST pension to your new provider. If however you have lost your job or don’t wish to auto-enrol with your new employer you can still make contributions into your NEST pension provided they are a minimum of £10 per month.
How will I know if I am being auto-enrolled? Do I need to do anything?
When your company is given it’s staging date your employer will have the responsibility of implementing auto-enrolment. They will then notify you of your eligibility for auto-enrolment within one month of the staging date. Not everybody is eligible to be auto-enrolled and more details can be found in the PowerPoint presentation on this page. If you wish to opt out once enrolled you can, however you will be automatically re-enrolled every 3 years.
What will I get out of this?
This is dependent on several factors; how much you decide to contribute, how long you contribute for and how you decide to draw your income once you retire. It goes without saying that the more you pay in and the longer period of time that you contribute, the higher your pension fund will be. However it is far from obvious what you should do with your money when it comes to retiring. There are many choices and not all of them will suit everyone. Choosing the wrong post retirement product can be exceptionally detrimental to your future income and we would always recommend an individual sought independent financial advice prior to making any decisions.