Many people sometimes dismiss the idea of saving for their later years, but the new auto enrolment scheme launched in October 2012 has seen 4 million lower-paid employees signed up to a workplace pension for the first time.
At Stipendia, auto-enrolment is one of the many factors we deal with on a day-to-day basis, so we thought it’d be useful to answer any questions you might have and try to provide a bit of information about the scheme.
It’s a government-backed scheme designed to eliminate a looming pensions crisis by forcing employers to set up pension schemes for their staff. Companies are legally obliged to set up a workplace pension and pay contributions into it. To benefit, workers also have to pay in some of their wages.
The scheme works by automatically enrolling a worker when they’re over the age of 22 and earning more than £10,000 a year. This figure will then subsequently rise each year. Similarly, part time workers who earn less than £10,000 can also join, provided they earn more than £5,772 a year.
The scheme is being rolled out over a 6-year period, beginning with larger employers. From June 2014, however companies with fewer than 49 employees must start enrolling staff, which will ultimately lead to 11 million workers being covered.
Matthew Rankine from specialist pension provider Liberty SIPP says “You are being offered a pension on a plate, with the promise that your employer will pay in too, and most people should jump at the chance,”.
Whilst you do make contributions yourself, you only have to contribute 0.8% of your salary. Your employer must also contribute at least 1% (and can pay in more if they so wish); tax relief will then add another 0.2%.
That will take your total pension contribution to 2% of salary.
This will increase from October 2018, when you will have to pay in 4% of your salary, your employer will pay 3%, and you also get tax relief at 1%.
This means that 8% of your earnings, including overtime, will eventually go into your pension, on earnings up to £41,865 a year.
Although you will be automatically enrolled on your company scheme, you can opt out.
If Auto-Enrolment isn’t for you then you can also invest for retirement through a stakeholder pension. These are flexible, low-cost personal schemes that allow you to save from just £20 a month, and you can stop and start contributions whenever you wish.