While the timeline is not yet certain, new measures are being introduced to widen the scope further. This will expand the criteria to qualify and increase the salary band on which contributions are calculated.
How does Auto-enrolment Work?
Currently, auto-enrolment and workplace pension schemes work as follows:
- Employers are required to provide a workplace pension for eligible employees.
- Workers who are aged between 22 and State Pension age, and who earn at least £10,000 must be automatically enrolled in the scheme.
- Employees can opt out if they choose, but they should be re-enrolled every three years and must actively opt out each time if they choose not to join.
- Other employees can join the scheme if they wish. Providing they are over 16 and under 75, and earn at least the lower earnings limit (£6,240), the employer still needs to pay their share of the contributions if the employee chooses to join.
- Normally, employees will pay a contribution of 4% of their qualifying earnings, while the employer pays 3%. A further 1% is credited as tax relief, taking the total contribution to 8%.
- Qualifying earnings refers to the band of salary between the lower earnings limit and the higher rate (currently £50,270). As a minimum, contributions must be calculated on this band of earnings.
Of course, this means that lower and higher earners do not always receive contributions based on their full earnings. However, higher earners are generally in a better position to negotiate their remuneration package and are less likely to be disadvantaged.
Contributions for lower earners will be addressed as part of the updated rules.
What is Changing and Why?
The proposals to update the auto-enrolment rules were initially proposed in 2017 and are now due to be implemented following parliamentary agreement.
The main changes are as follows:
- The minimum age of enrolment is reducing from 22 to 18.
- The qualifying earnings band will be removed, which means that pensionable earnings will be based on workers’ full salaries, rather than earnings over a certain amount.
This will improve the pension prospects of younger and lower-earning employees, encouraging them to start saving for retirement earlier. Investing slightly more, and for a longer timescale, is likely to have a significantly higher impact on your eventual retirement income rather than trying to make up the difference later in life.
Of course, this will have an impact on employers, particularly those which rely on younger workers earning minimum wage. At a time when employers are already facing higher costs, some smaller businesses may struggle to meet their obligations. There could also be an uptick in the number of businesses using unethical practices to avoid their responsibilities.
It has not yet been announced when the new rules will be introduced.
Reasons to Opt into Your Workplace Pension
If you have the option to join a workplace pension, there are several reasons why this is a good idea:
- The process is simple, and your obligations are minimal. It takes more effort to opt out than to go ahead and join the scheme.
- The contributions are deducted directly from your salary, which means you don’t see the money leaving your bank account. If you join the scheme at outset, it is likely you will barely notice the contributions being deducted.
- Workplace pensions generally have a limited investment choice, including a default fund. If you are new to investing, this removes another obstacle to saving for retirement. You can always diversify your funds at a later stage if you choose.
- You will receive tax relief on your contributions, which means the cost out of net income is lower than if you invested the money outside a pension. For example, if you are a basic-rate taxpayer, a £100 contribution will only reduce your net income by £80.
- Your employer will also pay into your pension, at no cost to you.
Of course, there may be reasons to opt out of the scheme, for example, if you really need the extra money in your pocket. However, this is only recommended as a short-term measure.
Some employers may allow you to opt out of the workplace scheme and have your contributions paid into the plan of your choice. Providing you are not missing out on your basic entitlement, this can allow you to access a scheme with more flexibility and wider investment choice.
Other Options to Boost Your Retirement Pot
If you aren’t eligible to join a workplace pension scheme, or if you want to make additional contributions and diversify your investments, you have a few options, for example:
- A stakeholder pension – these are usually simple and low-cost with a limited choice of funds.
- A personal pension – most of the pensions available to individuals fall into this category. The features and investment choice can vary widely, and the right choice will depend on what you want to achieve.
- A self-invested personal pension (SIPP) – this allows you to invest in an even wider range of investments, including commercial property and private equity. However, as platform-based personal pensions have grown in availability (and some are even referred to as SIPPs, although this is not technically correct), there are very few investment options suitable for most investors that would require a full SIPP.
You can set up these plans yourself, or a financial adviser can help you set up a plan, decide how much to contribute, and recommend the most suitable investments.
Please don’t hesitate to contact a member of the team if you would like to discuss your retirement options.
