What does auto-enrolment mean for your salary and your pension?
More than one million UK employers have now signed their staff up to a workplace pension as a result of auto-enrolment, according to the Pensions Regulator. That means that more than nine million people are now saving for their retirement with help from their employer.
And from the 6th April (the start of the new tax year) the minimum contributions both you and your employer have to make have increased. This will have an impact on your monthly pay packet but it means you could be getting a big boost to your retirement fund, without having to do anything. Here's your guide to how auto-enrolment works and how the changes can affect you.
What does auto-enrolment mean?
Auto-enrolment is a relatively new scheme designed to help every employee in the country save towards their retirement. It ensures that employers have a duty to save alongside their staff and it could help fix the pensions crisis.
It means that almost all employees will be automatically signed up to a workplace pension, rather than waiting until they choose to do so. Both the government and your employer make contributions, and you make them straight out of your salary too.
At the moment, you have to be earning at least £10,000 to qualify for auto-enrolment.
How does it work and how much do I have to pay?
It's actually pretty simple. You contribute a percentage of your income into your workplace pension fund (this comes out automatically each month) and your employer also makes a contribution. You have to make at least the minimum contribution.
From April 5th 2018, the minimum contribution you have to make is now 3% of your salary, rising from 1% in the previous tax year. But the good news is, that the minimum amount your employer has to contribute has also increased from 1% to 2%. This means that the amount that is automatically funnelled into your workplace pension has now risen to 5% of your earnings.
That hikes again in 2019 to 8%. At that point, you will pay 5% of your annual salary into your pension pot and your boss will match that with at least 3% of your salary.
While it may feel like there’s less cash in your pay packet, it does mean that your employer is paying you more overall - but the additional pay is going directly into your pension. It’s a pay rise that you didn’t even have to ask for.
And it's a big boost from 2% of your income a year to 5% - meaning it will hopefully be much easier to save for your retirement. It might seem a bit annoying that your contributions have increased without your say, but the reality is many people in the UK simply aren't paying enough into their pension to retire on a reasonable income. So the increase means you can be sure that you're saving a more reasonable amount, without having to think about it.
On top of all that, you get tax relief on your savings, paid at your usual rate of income tax. So, if you’re a basic rate taxpayer, and you and your employer contribute £80 into your pot, the government tops it up to £100.
That cash then remains invested in the scheme until you are at least 55 and can draw on it or use it to buy an annuity, where you use the lump sum in your pot to buy a guaranteed annual income for life.
Am I in it already?
You almost certainly are, if you qualify.
You qualify for auto-enrolment if you’re aged between 22 and state pension age, work for an employer and earn more than £10,000 from them. Self-employed people are not currently helped under the scheme, although the government is looking at how to support them to save.
Most employers had signed up by April last year and the deductions should be clearly printed on your payslip each month. There are now 9.3 million British workers signed up to a pension via auto-enrolment.
However, around 150,000 bosses have not yet joined the scheme, mostly because they only became employers after the roll-out had begun. Every employer should be signed up by June 2018, meaning every employee will soon be automatically enrolled.
Can I opt out?
Yes but that is unlikely to be a good idea. There’s a pretty wide divide between the lifestyle most of us want in our retirement and the amount the State Pension pays out – from April this year it will be £164.35 a week, or £8,546.20 a year.
For most people, auto-enrolment will be a real help because it removes any barriers to signing up for a pension and it ensures your employer has to contribute too.
If you do opt-out then you need to do it within the first month of being signed up, otherwise, any money you have already paid is locked into the pension scheme until you are old enough to access it.
There are some good reasons for choosing to opt out, for example, if you’re trying to pay down problem debt first. However, for most people, this is a great chance to save for a comfortable retirement.
Can I pay more (or less)?
Yes, if you can afford to pay more then that’s a great idea – especially if your employer will agree to match your contributions above the minimum requirements.
And if you want to reduce your payments then that is also an option, but your employer’s contribution will most likely fall too.
Yes, but how much will I pay?
It’s all well and good to talk about the general rules of auto-enrolment but you probably want to know specifically how it will affect you.
The Money Advice Service has a useful workplace pension contribution calculator, which shows how much you will pay in and how much your employer will contribute. It also shows how your contributions will rise over time.
Will it work?
Ummmmmm… pass. For those individuals who stay in the scheme, it will undoubtedly play a key role in providing a financially secure retirement.
However, whether enough people will remain in the scheme once the contribution rate increases in April and then again in 2019 remains to be seen. Since having enough money to enjoy retirement is a pretty admirable goal, here’s hoping they do.