e-mail Paul Lewis on paul@paullewis.co.ukStarting in October this year 11 million people who are not in a pension scheme at work will have to join one, whether they want to or not. It is called auto-enrolment and, as its name suggests, people in work will automatically be put into a pension scheme run by their employer. It will not affect everyone at once. It will take five years for the scheme to cover the whole working population. Auto-enrolment starts with the biggest firms. If you work for an employer with at least 50,000 employees you will have been auto-enrolled by the end of this year.
Employers with a pension scheme can enrol their staff into that scheme – as long as it meets certain minimum standards – or into a new auto-enrolment scheme if they prefer. Others will have to create a new one.
By the end of 2013 auto-enrolment will extend down to employers with at least 800 workers. Month by month more will be included until by September 2017 every employer will have to provide a pension scheme for their employees and pay into it. That will include employers with just one worker – perhaps a parent employing a nanny or someone with a micro-business employing just one other person.
Age and pay limits
Employees must be automatically enrolled into a pension scheme if they are
aged 22 to state pension age (currently 65 for men and about 61½ for women) and
earn at least £8105 a year (about £156 a week or £676 a month). That level of
earnings is called the ‘earnings trigger’.
People aged 16-21 or from pension age to 74 can join the employer’s pension scheme if they want to. And so can anyone aged 16 to 74 who earns less than £8105. People aged 75 or more (or under 16) cannot pay into a pension.
Contributions
At first the minimum contributions will be modest. Up to September 2017 they
will be just 2% of a band of pay between £5564 and £42,475 a year. These lower
and upper thresholds will be revised each April. Your employer will put in 1% of
pay in that band and you will pay in the other 1%. However, some of your
contribution will come from tax relief so your actual contribution will be 0.8%
of that band of your earnings. Tax relief of 0.2% of pay will be added even if
you do not pay tax. If you are paid £200 a week the minimum contributions will
cost you just 75p a week and the total amount going in to your pension will be
£1.86. People earning less than £5564 who choose to join the scheme will not get
any contributions paid by their employer.
From October 2017 the minimum contributions will rise to 3% from you including tax relief and 2% from your employer and a year later they will rise again to 5% from you and 3% from your boss.
You or your employer can pay in more than the minimum. If you are auto-enrolled into a scheme which has higher contributions than the minimum then you will have to pay those higher contributions.
Pension scheme
If your employer does not have a pension scheme then they will have to
create one. There are a number of schemes around that they may use. One is
called NEST, which is a low cost state-sponsored scheme. Another low cost scheme
is called NOW: which provides pensions to almost all workers in the Netherlands.
There are others. One advantage of NEST and NOW: is that your pension pot can
stay in the scheme even if you move employers or become self-employed and decide
to pay in.
If your employer already has a pension scheme then you may be auto-enrolled into that scheme. But some firms are keeping their pension scheme and setting up a separate auto-enrolment scheme. Normally staff will be able to move to the main scheme after a certain time.
People who are self-employed or work as a contractor will not be subject to auto-enrolment. But at least one of the major pension schemes – NEST – will allow them to join as an individual and pay in their own contributions up to a maximum of £4,400 a year and get full tax relief on them. At the moment no-one can move an existing pension fund into NEST. That may change in future.
Opting out?
Although eventually almost everyone in work will be auto-enrolled into a pension
scheme, they will also have the right to leave the scheme at any time. If you
are auto-enrolled and leave within one month you will get back any contributions
that have been paid. If you take longer than that then any contributions made by
you and your employer will stay in your pension pot.
If you do opt out you will be auto-enrolled into a scheme again every three years. You will also be auto-enrolled every time you change employer. The idea is that it will be more hassle to be out than in so people will tend to stay. Your employer cannot offer you any inducement or advice to opt out. If they do they will be breaking the law and could be fined by the Pensions Regulator.
Normally being in a pension scheme is a good thing. You will pay in less than half of the amount that ends up in your pension fund – the rest will come from your employer and tax relief. But for the first six years until 2018/19 the minimum contributions will be very small and so the amount contributed to the scheme will be tiny. The total paid in for someone earning the national average wage – £26,000 a year – will be barely £400 over the whole year. For people in their fifties who have barely a decade or so to pay in the total in the scheme will not be that great. Even a pension pot of £10,000 will buy you a pension of barely £500 a year at 65.
If your total pension pots are worth less than £18,000 you can take them out in cash. A quarter of the money is tax-free and the rest added to your income and taxed. Even if you have more than £18,000 in total pension savings, an individual pension pot of £2000 or less can be cashed in on the same terms.
The danger is that the pension you end up will mean you get less help from means-tested benefits. And that loss could cost you more than you have paid into your scheme. Generally speaking the lower your pay and the closer you are to retirement the less worthwhile it will be to stay auto-enrolled. However, if you (or your partner if you are in a couple) are likely to have an income in retirement which will take you out of means-testing altogether then paying into an auto-enrolled pension can never leave you worse off.
Your employer will choose the pension scheme you are auto-enrolled into. But individuals will have a choice within that scheme about how or where their fund is invested. For people who do not want to make those decisions there will be a so-called ‘default fund’ which will be a low risk fund. That will probably be best for most people. But there is no guarantee that any fund will be worth more when you retire than the money paid into it.
Your employer will tell you when you will have to pay into an auto-enrolment pension and the details of what it will cost, opting out, and your pension choices.
e-mail Paul Lewis on paul@paullewis.co.uk