- Employers will automatically enrol employees on schemes so long as basic criteria are met
- It isn't mandatory, employees may decide to opt-out
- Introduced due to expected future pension shortfalls
Automatic enrolment has just begun in the UK and chances are you’ve seen a few ads on the TV and read a bit about it online and in the papers, but what does it actually mean for you? This is our guide to automatic enrolment which should clarify why it’s being introduced, what exactly it’s for and how it will affect you.
- Fewer people are saving properly for retirement. The government estimates about seven million people are not saving at all for retirement, or not saving enough.
- Life expectancy is increasing so people will need financial support for longer.
- The government is worried about being able to afford to keep state pensions at their current level in the longer term.
What is it?
The government are introducing a new law which will be rolled out across the country in the next five years to make it easier for people to save for their retirement. The law is that all employers must automatically enrol their employees (if they meet a certain, broad criteria) into a qualifying workplace scheme. Employees can choose to opt out if they wish.
A qualifying work scheme is either a defined contribution scheme with a minimum contribution or a defined benefit or hybrid scheme which meets certain conditions. Employers will automatically enrol the following employees:
- Those not already in a qualifying workplace pension scheme
- Those who are at least 22 years old
- Those who are below state pension age
- Those who earn more than £8,105
- Those who work or ordinarily work in the UK
If you are already in a final salary scheme and it meets the minimum quality standards then you will be able to continue in that scheme as normal. If the scheme doesn’t meet minimum requirements then it might have to be amended but your employer will have to consult you first.
Do you want in?
If you don’t want to enrol into the scheme then you can opt out. If you opt out within a certain period of time then all payments will be refunded and it’ll be as if you never joined. If you opt out after a deadline then you won’t get any money back and it’ll remain in your pension pot.
- If you do opt out you can re-join at any time.
- Your employer will have to re-enrol you into the scheme every three years if you meet the above criteria to give you the opportunity to reconsider your decision.
The minimum requirements under the defined benefit scheme are that:
- It has a valid contracting-out certificate, indicating that it is an appropriate replacement for the state second pension; or
- It provides broadly equivalent or better benefits than the benefits of a contracted-out scheme.
In a defined contribution scheme the following applies:
- The amount paid in by you, your employer and the government from tax relief is worked out as a percentage of your salary.
- The total percentage of your contribution, your employers contribution and tax relief must reach a minimum amount set by the government. This amount will increase between2012 and October 2018.
- The minimum amount from October 2012-Sept2017 is 2%; between Oct2017 and Sept2018 this will rise to 5%; from Oct 2018 onwards it will be 8%.
If you want to know more about automatic enrolment, when it is coming in and how employers have to adapt to it then take a look at The Pensions Regulator guide. They have a whole host of information about the new law which should make understanding pensions of the future a little easier. The law is being introduced to protect future generations and encourage proper saving for the future but once you are enrolled it doesn’t mean you don’t have any choice over pension products, so if the system provokes you to think more about how you want to save for the future then it might be wise to get in contact with a financial advisor to discuss your options.