A quick guide to workplace pension reform and auto-enrolment
Since October 2012, all employers have to automatically enrol eligible employees into a company pension scheme that meets certain standards. The date your employer has to start doing this depends on how many employees they have.
You can watch our short video or read the answers to our frequently asked questions,which should help you feel more informed about the coming change.
If you have further questions about how this change is being introduced into your workplace and how it specifically impacts you, you should speak to your employer.
Why is this happening?
Two main reasons - we're living longer and not enough of us are saving for life after work. According to the Association of British Insurers, it's estimated that around 9 million working people aren’t paying anything into a pension at all.
Right now there are about three workers for every pensioner. But by 2050 it’s estimated that there will only be two workers for every one pensioner (source: ‘Automatic Enrolment into a Workplace Pension, Key Facts’, Department of Work and Pensions, Feb 2012). So it will be even more challenging for the state to provide an income for the growing number of people who have reached retirement age.
The state pension age is already changing in response to this – going up in stages to at least 68.
When will it happen?
When a company has to start doing this is based on their size.
The very largest companies - those with at least 50,000 PAYE employees - are scheduled to start in 2012. At the opposite end of the scale, businesses with less than 50 PAYE employees aren’t scheduled to start until at least June 2015.
But, companies can choose to start earlier or up to three months later.
Your employer will let you know when this is about to happen and if you are eligible.
How will it affect me?
If you’re already in a pension scheme that meets the quality standards set by the government it shouldn’t affect you at all. But you might see contributions go up in order to meet those standards.
If, when the time comes, you haven’t already joined your employer’s scheme and you are eligible, you will be automatically enrolled into it. What’s more your employer will have to contribute towards it. This could make up your entire contribution, but you may also have to pay into it.
Even if you’re not eligible you’ll normally still have the right to join your company pension scheme if you want.
But whatever your individual circumstances, the end result of these changes is that it will be simpler and easier for millions of people to start saving into a pension for the first time.
What are the quality standards for pensions set by the government?
The quality standards set by the government can differ depending on the type of pension scheme. But, generally speaking, it will have to meet these minimum contribution levels:
- 2% - with a minimum 1% contribution from your employer, rising to
- 5% in 2017 - with a minimum 2% contribution from your employer, rising to
- 8% in 2018 - with a minimum 3% contribution from your employer
These are calculated as a percentage of your annual, monthly or weekly qualifying earnings – depending on how you are paid. And qualifying earnings mean not just your basic salary but things like overtime and bonus payments too.
But your employer may choose to structure your company scheme differently, so you should speak to them.
Am I eligible?
You will be eligible if you:
- Are aged 22 or over
- Are under State Pension age
- Earn at least £9,440 a year, £787 a month or £182 a week before tax - depending on how you are paid
- Work or usually work in the UK
Even if you are not eligible, in most cases you will still have the right to join and have your employer pay into your pension. Your employer will tell you if this is the case.
And if you are not eligible at first, you might still qualify later when you are older or start to earn more money.
What if I’m not eligible?
If you are not eligible you will still have the right to join your company pension scheme if:
- You are between 16 and 75 years old
- Work or usually work in the UK
And if you earn at least £5,564 annually, £463.67 a month, or £107 a week before tax – depending on how you are paid - your employer will have to contribute.
But remember, if you are not eligible at first, you might still qualify later when you are older or start to earn more money.
What will it cost me?
This depends on the way the scheme is set up by your employer. But the government has set minimum contribution levels. These are calculated as a percentage of your annual, monthly or weekly qualifying earnings – depending on how you are paid.
Qualifying earnings mean not just your basic salary but things like overtime and bonus payments too. And they don’t necessarily apply to all of your salary – it may be just what you earn over £5,564 up to a maximum £42,475.
Minimum contribution levels start at 2% - with a minimum of 1% coming from your employer. It will rise in stages to 8% by 2018 - with a minimum 3% employer contribution.
But these are only the minimum requirements - your employer could choose to pay it all or they could set a higher amount for your payments. You should speak to them about how they are going to structure your company scheme.
Will my employer have to contribute to my pension?
One of the best things for employees about the new pension regulations is that, for the first time, employers will have to contribute to eligible employees’ pensions. Of course, many employers already do this – but now everyone in a company pension scheme that meets the new standards will benefit from this valuable contribution.
Minimum levels – calculated as a percentage of your annual, monthly or weekly qualifying earnings, depending on how you are paid – have been set for these contributions. They can vary, depending on how the scheme has been set up. But as a general guideline the minimum employer contribution levels will be:
- 1%, rising to
- 2% in 2017, rising to
- 3% in 2018
Your employer may choose to contribute more than the minimum – and you will normally have to pay in too. So you should speak to them about what they will be offering – and what you will have to pay in.
What if I already have a pension?
If you are already in a company pension scheme that meets the new quality standards it won’t affect you at all. But, if it doesn’t meet those standards, contributions into your pension are likely to increase and you might have to pay more.
And if you have another kind of pension you are happy with you may be able to use it instead of the pension provided by your employer.
But, whatever your situation, you could use this as a reminder to pay a bit more attention to your existing pension. Maybe it’s time to review the funds your pension is invested in or the amount you’re putting in each month. If you want to give yourself a future with more choices – these are the types of things you should take a look at regularly.
What if I don’t want to join my company pension scheme?
This could be a great opportunity for millions of people to start saving for the future – and benefit from an employer contribution to their pension.
But, if when the time comes you feel it isn’t the right time for you, you can opt out. If you do this within a month your employer will refund any payment you made.
You can still leave the scheme at any time, but if it’s after the first month, you won’t get your money back.
Remember that a pension should be seen as a long term commitment and its value can go down as well as up, and it may be worth less than what was paid in. However, do think very carefully before you opt out. You will be giving up not just the employer contribution but also the tax benefits that come with pension saving.
If you are a basic rate tax payer, the tax benefits mean that for every £80 that comes out of your pocket for pension payments, £100 will be invested in your pension. Laws and tax rules may change in the future. The information here is based on our understanding in September 2012. Your personal circumstances also have an impact on tax treatment.
If you stay opted out – and you are eligible – your employer will have to automatically enrol you back into their company scheme. This will happen every three years or so.