Are you in or out? Decision day looms for new pension schemes

A GOVERNMENT drive to get more people to put money aside for their retirement will soon be under way – and millions of us will be affected.

From October this year, the UK’s largest employers will have to automatically enrol their workers into an occupational pension scheme, if they are not already in one.

Both employer and employee will have to contribute to the schemes, provided the employee doesn’t exercise their right to opt out.

This will represent a huge change to retirement planning across the UK. At present, millions of people miss out each year because they don’t sign up to the pension schemes offered by their employer. It has been estimated that automatic enrolment could see up to ten million people saving into workplace pensions for the first time.

Here we answer your key questions as to what it’s all about and what it could mean for you.

Will auto-enrolment affect me?

If you are already in an existing pension scheme at work and it meets the government’s new standards, this will not affect you.

Employers have to automatically enrol workers who earn more than £8,105 (for the 2012-13 tax year) and are aged between 22 and state pension age. Auto-enrolment must take place no later than three months after appointment to a job, or the date on which the employee reaches the qualifying age.

If you are earning between £5,564 and £8,105 a year at present and are aged between 16 and 75, you will not be automatically enrolled into a workplace pension. However, you will be entitled to join the scheme, to which both you and your employer will still contribute.

If you are earning less than £5,564, you will not be automatically enrolled into the workplace pension. You still have the right to join, but your employer does not have to pay into it unless it chooses to do so.

When will my employer have to comply?

The law comes into force for employers between October 2012 and April 2017, with the exact auto-enrolment staging date for each employer predominantly determined by company size.

Larger employers – those with 120,000 employees or more – will be phased in first, starting on 1 October, 2012. Each subsequent month will see the new legislation come into force for another group of companies.

For example, firms with 2,000 to 2,999 employees will have to start complying from August 2013. Those with 160 to 249 workers will start in April 2014, while smaller employers with 30 staff or fewer will be phased in from November 2015 to April 2017.

How much will it cost me?

Contribution levels are being phased in over the next six years to allow employers and employees to prepare for the changes they will have to make.

Until September 2017, employees must contribute 1 per cent of gross salary, a figure that rises to 3 per cent by September 2018 and 5 per cent from October 2018 onwards. The contribution includes government tax relief, which means, for example, that the eventual 5 per cent contribution is effectively made up of 4 per cent from the individual and 1 per cent from the government.

Employers must pay in at least 1 per cent, 2 per cent and 3 per cent respectively, from those staging dates. These figures are minimum contributions: both you and your employer can contribute more if you want.

The total amount required can be made up from an entirely employer-funded contribution or a mixture between employer and employee.

If your employer does not choose to pay the full contribution, your investment amount will usually be deducted from your salary every month, reducing your take-home pay. Your pension contributions will, however, benefit from tax relief.

How will my money be invested?

Where your funds are invested will depend on the type of scheme your employer decides to adopt.

Your employer may still offer a final salary pension scheme, but the majority of private company pension schemes are “defined contribution” schemes and your contributions will be invested in a fund or range of funds to match your attitude to investment risk.

What you get back as a pension income when you retire will depend on the level of contributions, the charges you’ve had to pay, the performance of the pension investments and the level of annuity rates when you retire.

Can I opt out?

You can opt out of your scheme at any time by simply informing your employer of your decision.

If you opt out within a certain period (your employer will let you know the deadline), any payments already made will be refunded, as if you had never joined. If you opt out after this, the payments already made will not be refunded and will remain in your pension pot.

If you have opted out, you can rejoin at a later date. Your employer will also have a duty to automatically enrol you back into the scheme every three years. This is designed to give you the opportunity to reconsider your decision.

Why should I stay in the scheme?

The reason such radical measures are being introduced is that too few people are saving sufficient amounts for their retirement.

You will benefit from your employer’s contributions, which you would otherwise forego, as well as tax relief on your own contributions which will be claimed on your behalf from HM Revenue & Customs.

This means you will not be able to build up savings for retirement as quickly or as tax-efficiently in any other savings plan. Put simply, auto-enrolment could significantly help you to build a pension fund for a more secure retirement.

Why should I opt out?

There are very few reasons why you might choose to opt out of the scheme; the benefits are plain to see.

However, there are viable reasons in some cases. Affordability could be an issue. If you really don’t have the 
disposable funds available to afford the minimum pension contribution amount, you might opt out rather than stretch yourself too far and end up taking on unnecessary debt.

At the other end of the scale, you might have already reached the limits of the lifetime allowance for pensions (£1.5 million for 2012-13). Any amount over this allowance at retirement will be subject to a 55 per cent tax charge, so additional contributions into a pension would generally not be advisable.

• Simon Wiggleworth is a chartered financial planner at Cornerstone Asset Management