Pension auto-enrolment changes will affect the way employers provide pensions for their staff. Our guide breaks down the basics of automatic pension enrolment and what this means for you.
If you don’t already have a pension, and you are working for a company with a pension scheme, then you will soon be made to join that scheme.
The change is one of the biggest shake-ups in pensions for years and is known as ‘auto-enrolment’.
What is auto-enrolment?
If your company has a pension scheme, the new auto-enrolment rules mean that you will be automatically enrolled into it.
Can I opt out of pension auto-enrolment?
Well you can, but each year you will have to sign a form saying you don’t want to put money in that pension scheme. Basically, you have to actively not want a pension if you don’t want to pay into one.
What’s the start date for pension auto-enrolment?
It depends how large a company you work for. Larger companies will start to take part sooner, while smaller companies will have longer to implement the pension changes.
If a company has 250 employees or more then staff will be made to join a pension by 1 October 2012.
Companies with 50 to 249 staff have between April 2014 and April 2015 to implement the auto-enrolment scheme, while those with 30 to 49 staff have between August 2015 and October 2015 to comply.
If you work for a company with fewer than 30 staff then your firm must implement the scheme between January 2016 and 1 April 2017.
If you are working for a company which set up between April 2012 and September 2017 then auto enrolment will not affect you until 1 May 2017 to 1 February 2018. Those launching from October 2017 onwards must implement auto enrolment immediately.
Is auto-enrolment a good thing?
The government believes making people save into a pension is one way of making sure fewer people have to rely on the state pension scheme, which will become more and more expensive as more of us live longer.
Remember that saving into a pension can save you tax. This is because any tax you pay on contributions gets automatically refunded into the pension. So if you pay standard rate tax of 22% you effectively get £100 for every £78 you put in.
How much can I put into my pension?
You have to put in at least 8% of your annual salary. So if you are working for a company that matches your contributions you need only put in 4%, the employer then matches that with 4%.
An employer has to put in at least 3% so the most you will have to contribute on your own is 5%.
However the government said it has set the minimum pension contribution at an initially modest level. This amount is going to be reviewed in 2014 with a view to encouraging people to make higher contributions into their pensions.
What about the state pension scheme?
Auto-enrolment is just one of several changes involving a reform of the way we pay into our pensions.
You may have heard of NEST or the National Employment Savings Trust (NEST). This is a low cost pension scheme aimed at those on low to moderate earnings who are not saving into a pension.
In fact, some employers will use NEST in order to help with their auto-enrolment requirements, including businesses that existing pension providers may consider loss-making or not commercially viable.
I already have a pension, do I need to join?
Auto-enrolment only applies to people working for a company, so if you work for yourself or are part of a limited company then you will not be affected. In this case you may want to see an independent financial adviser.
Find out more about pensions in our crash guide to pensions.