This year will see the biggest shake-up to pensions most of us can remember, as the process to automatically enrol virtually all employees into a workplace pension begins in October. Joss Harwood (right), from financial adviser firm Eldon Financial Planning, explains what this means for you…
Pensions – the word that can glaze over eyes and plunge heads into the deepest sand.
Because of this, as a population, we are heading towards spending a significant portion of our lives under-resourced.
Under current rules, all employers with more than five employees have to offer a workplace pension, but not enough people are contributing.
The realities are, however, creeping into the public consciousness. On adviser service unbiased.co.uk's 'find an IFA' search, 31% of enquiries in January were for personal retirement planning, which means information and practical help is actively sought.
Delay is not an option. So from October, there will be an initiative to strengthen our financial futures. All those earning above £8,000 who are not currently in a pension scheme will be affected by auto-enrolment.
The largest companies are involved first, so many workers won't be enrolled until 2014 or later. By the start of 2017 every eligible worker who is not provided for at the moment - even where a firm has just one employee – will have joined a pension scheme, though you can opt out. We are, literally, all in it together.
Employers who already offer an approved pension scheme won't have to make changes, but they might have to amend the rules to let all staff join.
What exactly is happening?
In a nutshell, (using rounded figures) this is how it will work:
If aged 22-65:
- Earning more than £155 per week. You will be enrolled into a pension.
- Earning between £100 and £155 pw. You can choose to join and receive employer contributions.
If aged 16-22 or 65-74
- Earning over £155 pw. You can choose to join and your employer will make the minimum contributions for you.
Note that if you earn below the threshold you can still join. Your employer may contribute, but doesn't have to.
If your circumstances change and you become eligible, you will immediately be enrolled.
By 2017 there will be a minimum combined 8% of earnings contribution from employers and employees up to the higher rate tax band. These contributions levels will be phased in.
Let's be clear: we are not talking huge amounts here.
It is small beer, but this is far more likely to benefit you at retirement than buying lottery tickets.
'Don't opt out'
As saving for retirement is the right decision for the majority of people, if you opt out you will be put back in again three years later.
Employer contributions and tax relief will be lost, so why opt out? Be honest, what will you live on when you retire?
If you truly can't afford to join, ask your employer to pay some of your next pay rise – whenever that may be – straight into the pension.
The few who may need or want to opt out are those who expect their pension pots to be worth more than £1.5m, and those who fully understand their financial affairs and are making adequate private provision elsewhere.
If you work for different employers you'll be automatically enrolled into the pension for each employment for which you meet the eligibility criteria. If so, you may have several pots to start with.
Those on short-term contracts and working via agencies are included.
The question to ask your employer is: "When is our starting date and how will it affect me?"
If possible, start paying into your pension before. There is a concern employers may 'water down' the benefits in existing pension schemes and members need to be alert to this.
Destination retirement may look very different in future so we all need to make careful travel plans. The auto route is a good start.
Views are not necessarily those of MoneySavingExpert.com.