Workplace pensions are designed to get us all saving more for our retirement. Here's how they work and what they mean for your money.
From 1st June, millions of people across the country may see their salary drop as a result of their employer hitting their auto-enrolment staging date.
Auto enrolment, or workplace pensions, is an attempt from the Government to get us all saving more for our retirement.
The idea is that your employer automatically enrols you into a pension scheme. Then you, your employer and the Government contribute into your pension pot each month.
Who is included?
Employees must be enrolled into a workplace pension if:
- they are aged between 22 and the State Pension age;
- they earn more than £10,000 a year;
- they work in the UK.
However, workplace pensions are being phased in, so not all employers are yet taking part. The scheme started with the largest employers (those with more than 50,000 employees) back in 2012, with medium-sized firms following after that.
From 1st June, some smaller employers must launch their schemes, though this is itself being staged depending on PAYE reference numbers. As a result, your employer may not actually need to sign up to a pension scheme until April 2017 (or even 2018 if they are a new business).
This section of the Gov.uk website will help you work out if and when you will be enrolled into a workplace pension.
What will it cost me?
You have to pay a minimum percentage of your ‘qualifying earnings’ into your workplace pension. This is either based on the amount you earn before tax between £5,824 and £42,385 a year, or your entire salary before tax. Your employer chooses how to work this out.
To start with, you will pay out 0.8% of your earnings. The employer bumps that up with 1% of your salary, while the Government adds a further 0.2%. So that’s a total of 2% of your salary.
From October 2017 to September 2018 the minimum contributions will rise to 2.4% from the employee, 2% from the employer and 0.6% from the Government, making a total of 5% of your salary.
These minimum levels will increase to 4% from the employee, 3% from the employer and 1% from the Government from October 2018, meaning all of us who stay enrolled will have the equivalent of a minimum of 8% of our salary going into our pension pot each month.
Remember, these are the minimum contributions. You and your employer can choose to make larger contributions if you wish.
Where is my money going?
There are a number of different firms offering workplace pension programmes for employers. The Government established the National Employment Savings Trust (NEST) as its own provider, but there are many others including NOW: Pensions, The People’s Pension and Smart Pension.
Once you are enrolled into your workplace pension, you should be given the chance to decide how your pension is invested. For example, with The People’s Pension you can choose from one of three investment profiles (Cautious, Balanced and Adventurous), which determines the level of risk taken in investing your pension fund.
Exactly how your money is invested will differ depending on the pension provider.
Each provider has slightly different charges too. NOW: Pensions charges 0.3% of your pot, plus a monthly charge of anything from 30p to £1.50 on your salary level on entry. Meanwhile The People’s Pension levies a flat rate of 0.5%. NEST has an annual management charge of 0.3%, but also takes 1.8% of your contributions.
Most people will pay a maximum annual charge of 0.75% following the introduction of a Government cap.
Can I opt out?
Workplace pensions are not compulsory. You can choose to opt out if you wish.
Your employer will send you a letter informing you that you have been automatically enrolled. If you inform them that you wish to opt out within a month of being added, you’ll get back any money you’ve already paid in. Otherwise you will have to wait until retirement to get your hands on that money.
You will be automatically re-enrolled every three years, so long as you still qualify. Your employer will write to inform you when they do this.
What if I change jobs?
If you change employer, you will still be able to contribute to your original workplace pension. Just bear in mind that your old employer won’t!
Instead, you can join a new workplace pension scheme with your new employer. You may be able to combine the two pensions. Speak to your pension provider to establish your options.
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