October 2012 saw the introduction of the first phase of auto-enrolment, where the UK Government has made it mandatory for employers to enroll their staff into a workplace pension scheme. There are several reasons why these workforce pensions are being introduced, primarily based around the fact that we are living longer and, even with the state pension age being gradually increased, we need to put in place the mechanism to better fund retirement. The state pension, currently at £107.45 per week for a single person, is unlikely to be enough for most. With auto-enrolment now in place, John Mortimer, Director of Shepherd and Wedderburn Financial sets out some tips to help your journey around workforce pensions.
- Find out when you will be enrolled
Each employer will have a staging date when they must start automatically enrolling employees into the new pension scheme. The staging dates vary depending on the size of the workforce, starting with the largest and working down to the smallest. For firms with 120,000 and more staff, auto- enrolment began in October 2012.
- Find out if you are eligible
For auto-enrolment, the pension scheme will be open to all employees aged from 22 up to state pension age. Your earnings must be above the minimum level (currently set at £8,105 per annum, but this is likely to change each year). If you meet these criteria you will be automatically enrolled into the pension scheme. If you do not and you are aged between 16 and 75 and have earnings between £5,564 and £42,475 you can elect to opt in and still benefit from your employer’s contribution. If in doubt, ask!
- How much should I pay in?
You will have a minimum payment to make if you want to benefit from your employer’s contribution. This starts at 0.8 per cent of earnings and increases over the next five years to three per cent. At that point you will be receiving a one per cent government tax relief payment plus an employer payment of three per cent making a total contribution of eight per cent. Be careful because these percentages may only apply to earnings between £5,564 and £42,475 known as ‘band’ earnings. If you and your employer contributions are not based on your total earnings then you may wish to consider making a higher payment.
- Don’t rely on auto-enrolment to provide you with a comfortable retirement!
This may sound a bit self-defeating but employees should know that auto-enrolment is an attempt to ease people into saving for their retirement rather than provide a solution to the problem. They will need to make other provisions or pay more into their pension if they want a better income in retirement. The government envisages that in 20 years time about one quarter of the population will be over the age of 65. It wants employees to take more responsibility for their income when they retire and sees auto-enrolment as the starting point. In Australia, where more stringent pension regulations are in force, the employer contribution will start to rise to 12 per cent of earnings from July next year.
- Review your finances
This is an ideal time to reappraise your financial plans. Speak to an independent financial adviser and work with them to set a new plan. Ask yourself if you were retiring now could you live off the state pension of £5,587 per annum. Some advisers can run cashflow models to show you what amount of savings you need to put away to meet your retirement expenditure, taking into account future inflation. As a society we have moved away from a savings culture to a spending culture and a rebalance is required.
- Consider other ways to save for your retirement!
If you are contributing the minimum four per cent of earnings and benefiting from the extra four per cent from your employer and the government, think about building up a stocks and shares ISA as well. ISAs can complement your pension income when you retire because income from an ISA is not assessable to tax.
- Don’t delay
The earlier you start saving, the better your income will be when you retire. Putting things off will exacerbate the situation. Getting used to a regular pension payment is an excellent discipline and you will reap the reward of this later in life.
- Don’t ignore other liabilities
Don’t ignore other liabilities. When considering how much to pay into a workforce pension, don’t immediately give up or reduce repayments of a loan. It may be better to deal with this debt first before committing to a new outgoing towards your pension. Take a balanced view and if in doubt seek advice.
- Don’t listen to the doubters
Don’t listen to the doubters. There are too many people burying their head in the sand and refusing to take up any form of saving. It may take a while because less than 50 per cent of the workforce is saving into a pension, but this will change. As the baby boomers reach retirement and more and more are in receipt of a state pension, the only route left for future generations is for them to take control and make their own retirement provision. This is the start!
- As a famous corporal used to say, ‘don’t panic’.
As a famous corporal used to say, ‘don’t panic’. Treat workforce pensions as a positive event and review your own financial position. Where possible benefit from the generous employer contributions and income tax relief. After all, these payments are all going towards the pot of money that will provide you with an income when you retire.