From 1 October 2012, the government is introducing pension auto-enrolment, meaning that every company will have to provide a pension scheme and every employee will be automatically enrolled. You can opt out - but it's up to you to make that decision. So what do you need to know? Here's our quick and dirty guide to auto-enrolment.
Many women are under-provided for in old age, beccause we tend to prioritise spending money on other things, such as children or families, rather than thinking about our own future. Women are also more likely to be relying on a partner or husband’s pension to help see them through. However unless your partner gets a retirement income that will cover you sufficiently in the event that he dies, you may be left with very little to live on should the worst happen.
The scheme is being rolled out over the next few years.
NEST (the National Enrolment Savings Trust) is the government-backed organisation that is providing some of these pension shcemes. Your employer may prefer to go with a private provider, but NEST will guarantee to provide a pension scheme to every company that applies to it. Here are some of their FAQs:
If you are starting to save fairly close to retirement age, check with your pension scheme to see what type of investments they're going to put your money in at this stage of life. If you're within 10 years of retirement, NEST will put your money into lower risk investments which are less likely to be affected by rises and falls in the stock market than other types of investment. If you are with a private pensions scheme, find out if they too will do this.
Your employer must enrol you into a workplace pension scheme if you:
If you don’t meet these criteria, you may be able to ask your employer to enrol you and may still be able to benefit from an employer contribution. Ask your employer about this.
When you will be enrolled into a workplace pension scheme depends on the size of the organisation you work for.
Very large employers, those with tens of thousands of employees, are affected first, in late 2012 and early 2013. Smaller employers will follow after this, sometime between 2013 and 2017.
Your employer will give you the exact date nearer the time and tell you which pension scheme they are going to use. NEST (National Employment Savings Trust) is one of the schemes your employer may enrol you into. It is a new national pension scheme, run on a not-for-profit basis and has been set up specifically to cater for these workplace pension reforms.
As part of the total contribution into your workplace pension scheme, the government has set minimum standards that employers must meet.
For some schemes this requires minimum contributions, which, including your own contributions and tax relief, will start at 2% and increase to 8% over the next few years. Of this, the minimum employer contribution starts at 1%, increasing to 3%.
These minimum percentages do not apply to all of your salary. They apply to what you earn over a minimum amount (currently £5,564) up to a maximum limit (currently £42,475). This is sometimes called "qualifying earnings".
So for example, for someone who earns £18,000 a year, the minimum percentages are calculated on the difference between £18,000 and £5,564, which is £12,436.
Your employer can decide to pay more than the minimum contributions and so can you.
Let’s assume your employer works out the contributions to your workplace pension as a percentage of "qualifying earnings" as described above. If you earn £17,564 a year, minimum contributions will be based on £12,000 (because the first £5,564 of your salary is not taken into account). So the minimum percentage of 2% would be applied to £12,000 (or £1,000 per month) to work out the minimum to your pension.
Your employer has to pay half this amount – 1% – though they could pay more. The remaining 1% will come from your contribution and (assuming you are eligible) from tax relief.
This means that your employer would pay £10 a month, you would pay £8 a month and the government would contribute £2 a month through tax relief. So for a personal contribution of £8 a month, you receive £20 in your pension pot.
When pension contributions increase to 8% (in 2018), based on the salary above your employer would pay £30, you would pay £40 a month and the government would contribute £10 a month. So for a personal contribution of £40 a month, you receive £80 in your pension pot.
That depends on how much you and your employer contributes over the remainder of your working life, and what salary the contribution is based on. But to give an example:
In today’s money, NEST estimates that for a 40 year old with qualifying earnings of £15,036, retiring at 67 (SPA):
The annual income would be on top of state pension, which is currently £5,587.40 pa, giving a total annual income of £7,437.40.
This example uses NEST’s online Pension Calculator to give an idea of how this might look for an individual NEST saver. These outcomes are based on a member choosing to invest in the NEST Retirement Date Fund throughout their life and that this fund meets its stated inflation-plus objectives. Ther modelling suggests that a better or similar retirement pot will be achieved more than nine times out of 10.
We have included some of the information that has been used to reach these assumptions below – a full version of the assumptions used are available on the pensions calculator here.
Contributions – based on 8% of qualifying earnings throughout the saving period will increase in line with inflation.
Charges – 0.3% annual management charge, with 1.8% charge on contributions as they are made (combined, this is broadly equivalent to 0.5% AMC).
Options for the annuity chosen upon retirement are assumed to be: a single life, level (ie not indexed with inflation), no guarantee annuity.
Your employer should provide information about the scheme they are using. You should ask about its charges, how it will invest your money and what happens when you leave that employment.
NEST has been set up by legislation especially for automatic enrolment and is run on a not-for-profit basis in the interests of its members. It offers:
If you are automatically enrolled, you have a right to a contribution from your employer, which you might previously not have been offered.
There are a number of things you might want to think about when making your decision about staying in or opting out, including whether you have expensive debts to pay off such as credit card loans. If you do opt out, you will miss out on money from your employer that you would not get with any other savings vehicle. Even if you start saving fairly late in your working life, you should be able to accumulate more from a workplace pension than you would if you put the same money into a bank account, because of your employer’s contribution.