If nothing else, the slew of TV adverts which accompanied the introduction of auto enrolment will hopefully have raised awareness of the importance of making preparations for old age and of the fact that it’s never too early to start thinking about your future. Even though auto enrolment is now in full swing, its potential importance is high enough that it can be worth recapping what it means in practice.
The value of pensions and the income they produce can fall as well as rise. You may get back less than you invested.
Auto enrolment potentially applies to all working adults
Employers must automatically enrol all working adults into a workplace pension provided that they meet the relevant criteria. These are:
Not already be contributing into another workplace pension scheme (having previously been a member of another scheme is fine, as is contributing to a personal pension at the same time)/
Be aged between 22 and state pension age
Earn more than £10KPA
You can choose to opt out of auto enrolment, however if you do your employer must auto enrol you again after three years, unless you reconfirm that you wish to remain outside the scheme and so on for as long as you continue to meet the qualifying criteria.
Advantages of auto enrolment
From the government’s perspective, the main advantage of auto enrolment is that it works on the basis that people will have to take action if they take a conscious decision that saving for their later years through a workplace pension is not for them, at least not at the point, rather than obliging them to take action if they do decide that they want to make a commitment to saving for old age. From an employee’s perspective, the advantage of the scheme is that employers are mandated to make contributions on behalf of their employees, rather than being in a position to put pension contribution under the heading of optional benefits.
Disadvantages of auto enrolment
While the headline benefit of employer contributions may sound enticing, it needs to be viewed in context. The government has set a minimum level of contribution which needs to be made into a workplace pension (assuming the employee wishes to participate) and the percentage of this which needs to be met by the employer. There are three ways in which this minimum level of contribution can be calculated. These are known as tiers. At current time tier 1 requires a minimum overall contribution of 3% (of pensionable earnings), of which the employer must pay at least 2%. Tiers 2 and 3 require a minimum contribution of 2% of which the employer must pay at least 1%. As of April 2018, the minimum contribution will rise to 6% (Tier 1) and 5% (Tiers 2 and 3) of which the employer must pay at least 3% (Tier 1) or 2% (Tiers 2 and 3). From April 2019 the figures will be 9% and 4% for Tier 1 and 8% and 3% for Tiers 2 and 3. In other words, employees could find that enrolment in a workplace pension scheme does wind up making a noticeable difference to their take-home pay.
Alternatives to auto enrolment
With auto enrolment and workplace pensions making so many headlines, it’s easy to forget that even those in work can opt for private pensions and, in principle, employers could agree to make contributions towards them. Admittedly it is an open question as to whether or not they would, but in any case, the individual would still be able to qualify for tax relief on contributions at the going rate. As private pensions are outside the scope of the government regulations, they can offer more flexibility with regards to contribution levels and therefore, even without employer contributions, some people may find them a more suitable channel for their pension saving.
The Financial Conduct Authority does not regulate on Automatic Enrolment