As the government began introducing automatic enrollment at workplaces across the UK in 2012, a lot of people didn’t know whether it was a boon or a bane.
The ones who could barely make ends meet or had a pre-existing list of priorities were the ones who felt the crunch the most.
Even though the initial minimum salary contribution is only 0.8% of the earnings, the numbers are all set to rise in the next couple of years.
A minimum of 4% of the earnings of eligible people will be deducted starting 2016.
Is this beneficial for an average worker as the government wants you to believe, or is it just a strategy to reduce the strain on the state?
What would be the impact on the pocket of someone whose financial circumstances do not permit a pay cut?
Why Auto Enroll
A report by the Department for Work and Pensions in 2012 revealed that almost 900,000 employers in the UK offered little or no workplace pension benefits to their employees.
The numbers were staggeringly low in certain sectors like retail, real estate and construction.
With the state pension not nearly enough to live a comfortable retirement life, these employees faced the risk of facing an ‘income gap’ when they retire.
Factors like increased life expectancy and rising healthcare costs post a gloomy picture for people who do not have a retirement income plan in place.
With auto-enrollment, more workers will be entitled to a retirement savings scheme where employers will be obliged to make a minimum contribution too.
While it will not be enough to ensure that the ‘pension gap’ does not occur, it will still be an additional source of income which will prove to be invaluable in the retirement years.
Take the Free Money
Employers are now obliged to pay a minimum amount of money into a workplace pension scheme under the new reforms.
The actual numbers are:
- Until 2017, the minimum contribution towards a workplace pension scheme is 2% (employees to pay 0.8%, employers pay 1%, and you get a tax relief of 0.2%)
- In the years, 2017 to 2018, the minimum contribution will increase to 5% (employees will pay 2.4%, employers will contribute 2%, and you will get tax relief of 0.6%)
- From 2018 onwards, the minimum contribution will be 8% (employees will pay 4%, employers will contribute 3%, and you receive tax benefits of 1%)
These are only the minimum contribution numbers. Both employer and employee can contribute more towards it.
That’s like free money for you if you were not enrolled in a workplace pension scheme before, or if your employer made negligible contributions towards it.
If you opt out, you may have to create a private pension scheme and bear the entire cost of setting it up.
Reassess your finances
If you are in your twenties or thirties, the chances are that your financial circumstances may not be at their best.
You may have debts to pay off; you may be planning to start a family or buy a house. In such a scenario, a forced pay cut does not sound like an ideal proposition. (You can opt out of it anytime)
But auto-enrollment is also a great way to get started with the savings habit.
It allows you to gauge the impact of a pay cut on your financial planning and the effect it may have on your lifestyle. That’s like testing the waters before you jump in.
If you can make little sacrifices today and stay enrolled in your workplace pension scheme, it may have a significant effect on your retirement income.
What you need to be aware of
Despite all the perks, the minimum contribution levels are still relatively low and you cannot rest on your laurels yet.
You may still have to take action and set up additional pension schemes or investment plans to ensure that you can match the lifestyle you dream of.
The only reason why you may want to opt out of auto-enrollment is if you have unmanageable debts and find yourself borrowing money at the end of every month.
In this scenario, your goal should be to get on top of your debts first.
Confused on how you should plan for your retirement? Get a clear picture of what your options are with our article, Planning for Retirement.