Workplace pension laws have changed and the government has made it compulsory for all employees to be enrolled into a pension scheme by their employers.
This auto enrolment process began rolling out in October 2012 and is being phased in over a five year period. The effective date is determined by the size of the employer and full implementation is expected to be complete by 2017.
Why has auto enrolment been introduced?
People are generally living longer but not preparing properly for their retirement. Pension saving is at an all-time low since records began in 1953, with less than 3 million people currently paying into a workplace pension.
The government’s answer to this crisis is to enrol people into a pension scheme automatically, through their workplace. The Department for Work and Pensions (DWP) says it makes sense that employees would now need take action to not save, rather than having to take action to save. The thinking is that because there is no effort required, people are likely to remain enrolled and therefore save towards their retirement.
Employees will automatically be enrolled into a workplace pension if they are:
- Not already in a qualifying pension scheme
- 22 years or older
- Under the State Pension age
- Earning at least £10,000 a year
Who pays what?
Once fully applied, an employer will need to ensure contributions of 8% of the employee’s salary are made to a pension scheme. The 8% contribution is broken up as follows: 3% from the employer, 4% from the employee and 1% as tax relief.
Which pension will you be paying into?
Some employers might have their own company pension scheme set up – which is perfectly fine, as long as it qualifies. For those with no pension scheme, the government has set up a pension scheme called NEST (National Employers Savings Trust).
Can you opt out?
You are entitled to opt out if you would really prefer not to pay into the pension scheme, but think carefully before you do. By opting out you are essentially turning down money from your employer and the government.
You have to wait until you have been enrolled to opt out, and you must opt out within a month of being enrolled. Do this by completing an opt-out notice and handing it in to your employer. You will receive a full refund of contributions made within the month. Make sure your opt-out notice is filled in correctly and handed in in time.
If you do decide to opt out, you will have to do so every three years, as you will automatically be re-enrolled.