MoneyMagpie

Sep 12

Auto-enrolment: what it means for you

For years now, the government has been aware of the fact that most people who work for big companies don’t take advantage of company pension schemes. The fact that employees don’t bother to sign up saves big bosses a fortune each year. This is something that the government, fearful of an ageing population dependent on benefits, hopes to tackle through the new auto-enrolment legislation. But what is auto-enrolment, and how will it affect us, the humble workers?

What is auto-enrolment?

Auto-enrolment is a new law which will mean that all employers have to automatically enroll their employees into their company pension scheme. The idea was suggested following a 2009 report by the Department of Work and Pensions which showed that just four out of 10 private sector workers take advantage of their company’s pension scheme.

According to the laws, employers will have to automatically enroll all employees who are aged over 22, and earn more than £8,105.00 a year. They will also have a duty to pay a minimum amount into their employees’ pension schemes, starting at 1% when the law is introduced, and slowly rising to 3% by 1 October 2018.

Does it apply to all companies?

The law will be slowly applied to different companies over time. If you work for a company that employs more than 120,000 people the law will come into force in October 2012. If there are between 50,000 and 119,999 people employed in your company, the law will apply from November 2013.

The dates at which the law will apply are staggered over time, for logistical reasons. Small companies have lots of time to prepare; if a company employs less than 50 people, for example, they have until April 2015. There is a table showing the implementation dates for different sizes of companies here.

Why should I join my employer’s pension scheme?

Here at Moneymagpie, we’re pretty clear about our thoughts on company pensions. We say if your employer offers it, grab it! This is for two reasons.

Firstly, whatever money you put into the scheme will usually be matched or exceeded by your employer. If you earn £20,000, for example, you might have to put in 5% of your salary, with your employer putting in another 3%. A 3% cut of £20,000 is £600, so if you don’t take advantage of the scheme, you’re basically throwing away £600 a year!

Secondly, your employer will usually deduct your pension contributions from your salary before deducting tax (but not before deducting national insurance). This means that some of the money you put into your pension is money you would have lost to tax anyway. Sticking with the above example, although you would have to pay £1,000 a year, you’d only pay tax on £19,000 of your salary (ignoring National Insurance for now).

Of course, company pensions are not foolproof. If the pensions company your employer works with invests badly, you could still lose your money. And, as we have seen recently with the strikes over cuts to teacher’s pensions, rules applying to public sector pensions are at the mercy of whichever government is in power.

Yet we still say that on the whole, they’re a good thing. Using the above example, if the value of your investment dropped by a third, you’d still only be losing the money your employer put in for you, not your own cash.

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How does this affect men and women?

Over the years the figures have shown that more men than women contribute to a company pension scheme.

According to the Annual Survey of Hours and Earnings, carried out by the Office for National Statistics in 2010, 39% of men and 28% of women belonged to a private sector company pension scheme.

We can’t say for sure why this is. One woman we spoke to told us that she would rather spend her money on her children than on a pension. Women are also more likely to work part time, and as a result they may feel that it is not worth joining the company pension scheme, or they may not be eligible for it.

The trouble is that women who don’t take advantage of company pension schemes simply store up problems for the future. They may find they are a burden to their adult children, at a time when they have their own children to provide for.

Added to this, women tend to live longer than men (just visit your local retirement home and see how many of the residents are female) so they may need a pension for longer.

I’m an employee – how much will I have to pay?

The employee’s minimum contribution will rise to 5% by October 2018. This means that all employees will have to pay more into their pension than their companies pay in for them.

I’m an employer – what will I have to pay?

You’ll have to pay 1% of your employee’s gross salary initially, rising to 3% of their gross salary by 2018. This will have to be paid into a scheme that has been approved for auto-enrolment. If you already have a pension scheme in place and want to use it, you’ll need to check with your scheme provider whether it can be used for automatic enrolment.

If not, you may need to choose a new pension scheme. There are lots of interactive tools to help you work out when this will apply to your company, how much it will cost, and how you should auto-enroll your employees, here.

Can I opt out?

Yes. The idea behind auto-enrolment is to make sure employees do not lose out on a pension simply because they forgot to fill in the form, or because they weren’t told about the pension option.

When auto-enrolment comes into force, or when you start a new job after that point, your employer will tell you how long you have to decide if you want to opt out. If you do opt out, and some pension payments have been taken from your salary, these will be refunded.

Your employer will also have a duty to automatically enroll you into the scheme every three years, so if you really don’t want to join, make sure you keep your eye on this!

Interestingly, a survey by insurance company Aviva found that most corporate (company) advisors were predicting that about 30% of people would opt out of auto-enrolment schemes. Half of all these advisors said they thought the highest drop out rates would be amongst the under-35s.

We think this is a shame, because if you invest in a pension when you’re young, it has the chance to grow over a longer period of time, so you’re likely to get more for your money!

Will joining a workplace pension scheme mean I receive fewer benefits when I retire?

At the moment, state pensions are means tested, so if you have a private pension or savings, you receive a lower state pension. If means-tested state pensions are still around when you retire, then you might feel you have put money from your own wages into a pension, when you could have done nothing, and received that money from the government instead. It is a risk.

Alternatively, the government might remove state pensions, or change the rules entirely, and you’ll end up wishing you had a private pension.

The trouble is that none of us are able to predict the future. However, it’s a fact that thanks to better diet and medical care, we’re all living longer these days. This is putting an increased strain on the government’s pension pot, and there’s a chance that in future there simply won’t be enough state pension to go around.

For these reasons, we think it’s a really good idea to stay enrolled in your employer’s pension scheme, even though you’ll lose money from your pay packet right now. If you’re going to struggle without the extra £60 a month (for example) that will be taken from your pay packet, why not try and make some money on the side to make up for it? There are lots of ideas in our Make Money section.

Don’t forget the money you put into your pension will grow over the years, so with any luck it’ll be worth more than the state pension when you come to retire.

I’m not happy that my employer puts in 3% while I put in 5%, what can I do?

At the moment, the new auto-enrolment legislation will require employees to put 5% of their salary into the company pension, with employers adding a further 3%. This is partly because big companies lobbied the government while they were making the law, and told them the auto-enrolment scheme would be expensive to put into place, that it could put small companies out of business, and that jobs might be lost as a result.

However, there’s no reason that individual employees shouldn’t push for higher contributions from their employers. When you’re looking for a new job, always take a close look at the pension offered with the job, not just the final salary.  Many companies will put in more than than the minimum 3% and you should bear this in mind when deciding which jobs to pursue!

If you’re already in a job and you feel that you’re valuable to your employer, why not ask them to increase the amount they put into your pension, perhaps in return for taking on extra responsibilities?

As ever, make sure you read the small print when you sign up to a company pension scheme. Many pension management companies charge fees. These should be absorbed by your employer, but as no one really knows yet how auto-enrolment will play out, it’s worth checking this for yourself.

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