This week marks the end of one tax year, and the beginning of the new 2017/18 tax year. For investment ideas, back to basics education and advice from the experts read Morningstar’s Guide to Planning for Retirement.
Launched in October 2012, starting with the country's largest companies, auto-enrolment will sign up around 10 million people to workplace pension schemes by completion in 2018.
The Government-led initiative was launched to boost the number of Britons saving into a pension, and ensure they have enough cash in retirement to maintain a comfortable standard of living. The scheme moves the burden of retirement provision off the public purse and onto the individual and the private sector. Auto-enrolment rollout began with the country’s largest businesses and is now in its final stages where micro-businesses which have as few as one employee, are setting up pension schemes.
Before auto-enrolment began, seven in 10 private sector workers did not have a retirement savings plan, and risked being plunged into poverty at retirement. The gap between the savings these workers had and their income needs was coined the “pensions gap” and auto enrolment was designed to plug it by making workplace pension schemes opt out rather than opt in.
Why Do We Need Private Pensions?
As life expectancy grows, so does the number of years Britons will spend in retirement. While the State Pension still promises a base level of income for all pensioners, this is not enough to guarantee a comfortable retirement.
Some economists also predict that the State Pension may be scrapped in the future, as it is a significant burden on the public purse. Auto-enrolment paves the way for this development.
How Does it Work?
When an individual is signed up for a workplace pension through this new scheme, they will automatically begin contributing 1% of their gross annual pay towards their pension. Their employer will match this contribution and the Government will add tax relief. Employees can choose to up their contributions, and this will be matched by the employer up to a pre-agreed cap.
From 2018, when auto-enrolment is fully implemented this minimum will jump to a 3% from the employer. Employees will be required to contribute 4% of their salary and there will be a 1% tax relief from HMRC. There have been concerns raised regarding this arbitrary increment, which may put lower earners off contributing to their pension and choose to opt out. Some have suggested that hikes in contributions should instead come in-line with rises in an individual’s wages.
Who Will Be Automatically Enrolled?
Employers have to automatically enrol workers who fit the following requirements:
- They are not already in a qualifying workplace pension scheme
- They are at least 22 years old
- They are below the State Pension age
- They earn more than £10,000 a year
- They work or ordinarily work in the UK
Employees who earn more than £5,876 a year but less than £10,000 are not auto-enrolled, but can request to be opted in to their workplace pension scheme.
There have been complaints from part-time workers and the self-employed who are unfairly penalised by the auto-enrolment rules. More than six million people have been passed over for auto-enrolment because they were not eligible since it was launched. Of this figure it is estimated that three quarters are women.
Only 76% of workers meet both the earnings and age eligibility criteria for automatic enrolment. For fifth of the workers that do not qualify for auto-enrolment it because they earn less than the minimum threshold, 5% are too young – or are older than the state pension age. Because many of these workers are part-time a disproportionate amount of unenrolled workers are woman, in fact, just 65% of female workers meet the eligibility criteria for auto-enrolment. Women are more likely to have flexible working hours following childbirth.
Opting In and Opting Out
Prior to October 2012, employees had to consciously opt-in to workplace pensions. With the new rules in place, employees will now have to opt-out.
If an individual does not want to be in a pension scheme, they can choose to opt-out at any point.
According to the Pension Advisory Service website: “You can choose to opt-out of your scheme at any time if you want to. If you opt-out within a certain period – your employer will let you know of the deadline – any payments already made will be refunded, as if you had never joined. If you opt-out after this, the payments already made will not be refunded and will remain in your pension pot.”
Conversely, if an individual does not qualify for automatic pension enrolment, they still have the right to join the scheme if they want. They can ask their employer to include them in the pension scheme and the employer must honour their wishes.
