With a burgeoning ageing population that is heavily reliant on State Welfare, the UK government has introduced new reforms in which employers will now eventually have to offer a workplace pension scheme and enrol eligible workers in it.
This is called Automatic Enrollment, and it has been introduced to help people save more for their retirement.
The new system is being introduced in phases, and by 2018, all employers in the UK will have to comply with it.
While earlier, it was a matter of choice, it has now become a legality to comply with, for employees and employers.
If your financial situation does not allow paying towards an employee pension scheme, do you have a choice?
Here are some facts about Automatic Enrollment.
When will you be automatically enrolled?
As mentioned earlier, the rule is gradually being implemented. The largest employers in the UK (more than 120,000 staff) were the first ones to introduce the new rule. The medium-sized employers are now following suit. The small-sized employers will be the last ones to introduce it. In fact, Auto Enrollment has also been extended to companies with fewer than 30 people.
Depending on what category your employer belongs to, you can expect to be automatically enrolled somewhere in the next three years.
You will be informed about the exact date by your employer well in advance allowing you to plan out your finances accordingly.
The entire system is being governed by the Pension Regulator to ensure that workers are introduced at the right time.
The Eligibility for Automatic Enrollment
According to the new system, any person working in the UK above the age of 22 but under the State Pension Age who earns more than £8,105 annually will be eligible for automatic enrollment.
Workers who earn lesser or who work part-time can request to be enrolled. If they earn more than £5,564 annually, then their employer will also have to make a contribution towards their pension scheme.
If you are employed but above State Pension Age or below the age of 22, then you can still choose to opt-in your employee pension scheme.
Do you have a choice?
Yes, You do. You can read our article, ‘What Are The Benefits of Automatic Enrollment?‘ to get an idea of what you will be getting or missing out.
Employees are given a letter informing them about the starting date for Auto-Enrollment, details about the scheme and the Pension Provider.
You can then request an opt-out form from the pension provider if your financial situation does not allow you to contribute towards an additional pension scheme.
If you opt out within one month of enrollment, then you will receive a refund of any amount that you may have contributed towards the scheme.
If you choose to opt out at a later time, then any amount that you may have contributed towards the scheme will remain in your pension pot until retirement.
Employers are required to re-enroll people who have opted out after every three years. So, even if you have opted out of the pension scheme, you will be automatically re-enrolled after three years. You will then have the choice to remain in the scheme or will have to complete the opt-out procedure once again.
But opting out deprives you of the employer's contribution towards your pension and the government's tax relief.
What will be my contribution?
Currently, only a minimum contribution of 0.8% of your earnings will have to be paid towards the workplace pension scheme. The employer will add another 1%, and the government will add 0.2% in the form of Tax-Relief.
However, these amounts will increase in 2017 and 2018 to a minimum of 4% contribution by the Employee, 3% from the employer and 1% Tax-Relief by the government. This will apply to anything earned above £5,824 to a limit of £42,385 including overtime and bonuses.
The funds will be accumulated in a Pension Pot and depending on whether it is a Pension firm, a government-backed organisation or an Insurance company that runs the scheme, each worker will be given options on how they choose to invest these funds.
There will be high risk as well as safer options to choose from. In exchange for the investment services, the pension provider will levy an annual charge which will be taken automatically from the pot.
Despite it sounding like a pay-cut, a workplace pension scheme has a bundle of advantages. Opting out should be the last thing on your mind.
Need an advisor on choosing the right retirement pension plans? Read our article, ‘How to Select a Financial Advisor’.