You will have seen an increase in publicity about your employer's pensions recently, but what does it really mean to you? If you are not already a member of your company pension scheme then your answer is probably “not much!”
Auto-Enrolment is coming to your company soon, meaning you will automatically have to join their Pension scheme. So it WILL affect YOU! (a full explanation of what Auto-Enrolment can be found here)
Before we consider that more closely we need to understand what’s behind all these changes to Pensions.
Why has auto-enrolment come about?
At the moment we all qualify for the State Pension because we pay National Insurance (NI), but the NI contributions we make have never actually been used to provide our own individual State pension. In reality, the NI you paid this month was paid straight to old Fred around the corner as his State Pension. This system worked perfectly well when there was strong employment, and pensioners didn’t live very long after retirement, giving a ratio of around 5 people working for every 1 pensioner claiming their State Pension. Times have changed, with many pensioners living well into their 80’s or 90’s, and we now have around 1 pensioner to every 3 employed.
In addition, those with total Income below a certain level at retirement receive a “top up” in the form of Pension Credit, increasing the burden on the State still further. The State is therefore increasingly subsidising the Pension system. This will inevitably result in the Government (and I do not mean any particular political party) having to increase NI or Income tax rates. That’s a sure-fire vote loser for any Government.
It’s clear that the current State Pension system is unsustainable, so the Government has to make changes. Hence they have introduced Auto-Enrolment. By making it automatic to join your employers’ scheme, and compulsory for your employer to have a scheme in place, everyone should have a higher income when they retire. This should make a significant difference in the future funding needs of the State.
Whilst there are no official plans at present, it isn’t hard to imagine that once this is fully established we could see the reduction in, or even the end of, Pension Credit. It could even potentially signify the beginning of the end of the State Pension itself.
So what does Auto Enrolment really mean to you?
- To start with you’ll be protecting yourself against possible changes to the State Pension & Pension credit system.
- The pension will follow you if you change employer
- You’ll have a definite income in retirement
- Initially you will have to contribute only 0.8% (increasing to 4% eventually by 2018) of your pensionable salary. So if you earn £20,000 per annum this actually means your net pay will reduce by only £9.60 per month, not massively unaffordable I’d guess!
- Your employer also has to contribute if you are a member, so it will be part of your overall Total Salary package (They’ll add around £12 to your £9.60)
- The tax man adds a bit too (another £2.40), meaning you’ll have a total of £24 invested in the pension
- There is a catch to Auto-Enrolment, which is that once enrolled you have the right to opt back out, which kind of defeats the objective!
- You are obliged to contribute, and this of course reduces your take home pay. If you are not currently a member this “opt out” option may therefore look attractive to you.
- You may also have heard horror stories about Pensions losing money, and not want to join any scheme because of them. The new schemes are designed to adopt a more Cautious investment style with regular reviews to avoid this
- If you opt out you will be offered another chance to join in 12 months, and 24 months, but will be Auto-Enrolled again in 36 months, meaning you’ll have to opt out again
- If you opt out, and your colleagues do not, they’ll effectively be receiving a higher income from your employer than you do, as the employer contribution is on top of their salary. This will eventually be 4% more!
- Some employers, knowing they will have to contribute, may factor this into their planned pay rises. For example they might have budgeted a 3% increase, but offer instead a 2% pay rise and 1% to the pension. So if you “Opt out” you effectively lose part of the pay rise. (Note if this is the case this may affect your pay rise for several years right up until 2018)
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