Pension changes how will they could affect you?
Major changes to pensions that will affect millions of people have been launched this month – but many of us have yet to grasp their significance.
Pensions Minister Steve Webb has started a programme that he describes as a 'truly historic change”.
It is called auto-enrolment (AE), and means workers will have to pay into funds for their retirement unless they actively opt out.
The Government says it could mean 11 million people saving into workplace pensions for the first time.
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Mr Webb said: "From this month, we will start seeing large firms, such as banks and big supermarkets, automatically enrolling their staff into a workplace pension. Between now and 2018, more and more employers will come on stream – right down to the smallest ones.
"If we can get between six and nine million more people saving in a pension by the time all employers are in, that’s a genuine savings revolution."
But in spite of a high profile advertising campaign fronted by celebrity bosses such as Karren Brady many people in Staffordshire and across the country remain unaware of what AE is or why it is being brought in.
Gareth Reynolds, of MGS Financial in Lichfield, said many employers had not grasped the importance or effect of changes to their business.
He and many of the UK's 30,000 financial advisers are busy trying to offer support to some of the 850,000 employers who will be affected.
Like many of his colleagues, Mr Reynolds said people would need to consider other tax-efficient forms of financial preparation for later life, such as ISAs, as well as the pension.
“AE should be just one step in saving for retirement as most employers/employees are likely to stick with the minimum contribution levels of eight per cent, which are unlikely to lead to a pension high enough to live well on,” he said.
Some experts say a contribution rate of 12 per cent would be a better starting point and all advised workers to check regularly whether their savings for retirement are on track.
The Government says a new approach to preparing for old age is needed because more people are living longer yet fewer people are saving into company pensions.
In the past 25 years, life expectancy at age 65 has increased by five years for men and three years for women.
In 1901 there were 10 people working for every pensioner in the UK. In 2010 there were three people working for every pensioner. By 2050 it is expected this will fall to two workers.
The West Midlands has one of the lowest pension participation rates in the country, with only 39 per cent saving for retirement. This is down from 55 per cent in 1997.
Across the country, fewer than three million private sector workers put money into schemes, whereas in the 1960s the figure was more than eight million.
Joanne Segars, chief executive of the National Association of Pension Funds (NAPF), said: "The UK is drifting towards an iceberg when it comes to paying for its old age pensioners, and we need radical reform like this."
The Government hopes that by placing people in schemes unless they opt out, many will start to put money away almost by default.
Some people will say that in straitened times they cannot afford to pay into a pension but experts say it would be foolish not to take advantage of the scheme, because Government contributions and tax breaks will quickly increase the size of the pot.
Here, we take a look at 10 of the most pressing questions about auto-enrolment and how and when it could affect you.
1. What is auto-enrolment?
Auto-enrolment makes it a legal requirement for companies automatically to enrol their employees (both current and new) into a workplace pension. As things stand, if your company offers a pension scheme and you want to join it, you will have to actively sign up. But under auto-enrolment, employees will be automatically signed up and will have to actively opt out instead.
2. When does it start?
Officially auto-enrolment began on October 1. It will be implemented as a gradual roll-out over the next six years – and the date it will specifically affect you will depend on the size of the company you work for.
The first phase will apply to large companies employing more than 120,000 people – although there are provisions for a three-month delay to this start. Smaller companies are unlikely to undergo the changes until 2017.
When your workplace begins auto-enrolment, you'll know. You will be sent a letter with an explanation of the new pension scheme, how much will be paid into it, and what date it will start.
3. Will everyone be affected?
No. To be automatically enrolled in your company pension scheme the criteria are as follows:
- You are at least 22 years old
- You are below state pension age
- You earn more than £8,105 a year
- You are not already part of a company pension scheme
- You work in the UK
However, even if you do not fit these criteria, you still have the right to join your company's pension scheme if you make the request – and your employer must agree.
4. How much of my salary will I have to contribute?
Workers will have to pay in 1 per cent of their gross annual income, with employers contributing another 1 per cent. However, from October 2018, the total amount contributed will have risen to 8 per cent of gross monthly pay, of which the employer pays 3 per cent and the employee 5 per cent Employees can choose to pay more than this however.
5. What pension options will be available?
There are two main types of workplace pensions – a defined benefit scheme and a defined contribution scheme – the latter of which is the most common.
With a defined contribution scheme, the money paid into your pension pot will be distributed across various investments, such as shares.
Over time, these are expected to give a better return than savings accounts, although along the way may experience dips.
With a defined benefit scheme, the amount you will receive when you do retire will depend on factors such as how long you have had the pension for and also on your earnings – for example a 'final salary' scheme.
6. Are my returns guaranteed?
No. As previously mentioned, as you are at the mercy of the stock market, the value of your pension may fall as well as rise. But one of the reasons that people are encouraged to start saving into a pension as early as possible is because it gives longer for the value of your investment to grow and ride out stock market volatility.
7. What happens if I move jobs?
Another aim of auto-enrolment is to make it simple for employees to transfer their pension if they move to a new company through a 'pot follows member' system. Options to make this as easy as possible are still under discussion.
8. I don't want a pension – how do I opt out?
You are entitled to opt out of the pension scheme. However, every three years your employer will automatically sign you up again and you will have to repeat the process.
You can choose at any point to leave the pension scheme. If you do this within a stated period, you will be refunded any money that you paid in. But once this period has elapsed, the money won't be refunded and will remain in your pension pot.
9. I own a very small business – what are my options?
Legally, even if you only employ one person (and they earn over the threshold) you will have to offer them a pension. However, as the roll-out is starting with the biggest companies' first, private individuals won't be affected until April 2017.
One option could be to use the newly created National Employment Savings Trust (NEST.) This not-for-profit organisation set up by the government offers a way for smaller employers to meet their obligations.
10. Are there any downsides to auto-enrolment?
Even if your pension pot has performed well over the years, this could result in you losing some means-tested benefits later on. But a pension is likely to be a better option than relying on state funds years down the line anyway.