What are employer obligations on pensions?

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pensionsPensions laws are changing due to government concerns about so many workers failing to save and facing poverty in retirement.

Under a new regime coming into force in October 2012, your employer will therefore be obliged to enroll you into some kind of workplace scheme – as long as you are aged between 22 and the state pension age, earn more than £7,475 a year and do not already have an occupational pension.

Does that mean my employer will have to enroll me in a workplace pension scheme later this year?

Not necessarily. While very large employers must comply with the new regime from later this year, smaller companies can delay the process for several years.

Your employer’s obligations include giving you the exact date, along with details about how to join, or to opt out of the scheme should you wish to do this, nearer the time.

How much will I have to contribute to the scheme?

Under the new rules, employers will eventually have to pay at least 3% of each staff member’s salary towards an employee’s scheme, while workers will contribute at least a further 4% and the government 1%.

These minimum percentages do not apply to all of your salary, though.

Instead, they apply to your earnings between a minimum amount (currently £5,035) and a maximum amount (currently £33,540).

For example, if you earn £18,000 a year, the minimum percentages will therefore be calculated on the difference between £18,000 and £5,035, which is £12,965.

If you earn more than £33,540, on the other hand, you will not make contributions based on your earnings above this amount.

What else is my employer obliged to do according to the new rules?

If you’re being automatically enrolled, your employer must write to you giving details of the scheme and what percentage of your salary will be paid into it.

And if you’re already in a workplace pension, your employer must confirm in writing that the pension meets the government’s new standards.

Once the scheme is up and running, meanwhile, your employer is obliged to pay your full contributions on time.

Your employer cannot, however, offer incentives to workers to opt out of their workplace pension or imply that you can only be employed if you opt out of the scheme.

Is this change a good thing?

The Department for Work and Pensions claims that the auto-enrolment plan will “give millions of people the opportunity to save into a pension with a contribution from their employer”.

However, while only about four in 10 private employers currently provide a pension scheme, typical company contributions range from 6% to 10%.

Figures from adviser Hargreaves Lansdown show that reducing employer contributions from 6% to 3% would result in a 30-year-old male worker currently earning £25,000 losing £1,400 a year by retirement.

Workers who have already been saving towards their retirement for years could lose out as a result.

Tom McPhail, pensions expert at Hargreaves Lansdown, said “There is bound to be a degree of redistribution of employer contributions.”

Remember that making your own Personal Pension arrangements will not impact your State Pension benefits. Find out the facts about State Pension and what you’re entitled to.