Workplace pensions: what's changing?
26 September 2012
Head of Workplace Strategy forStandard Life
To make planning and saving for retirement easier, from October 2012 rules are being introduced that mean employers will have to provide pensions for their employees. The changes are being phased in over several years, with large companies leading the way. Here’s a quick guide to what’s happening and when.
A wake-up call for reluctant pension savers
Some people are positively chirpy in the morning, leaping out of bed as soon as they open their eyes. But they’re in the minority. Most people need a gentle nudge from the alarm clock before they drag themselves out from under the covers.
When it comes to retirement saving, it seems many of us are hiding under a metaphorical duvet. Just under two in five UK employees are building up a company or workplace pension(1), which is why the Government is using a gentle ‘nudge’ to encourage the UK workforce to save more for retirement.
The changes are being phased in, beginning in October 2012 with the largest employers. Eligible employees will be automatically enrolled in the company pension scheme - this is called ‘automatic enrolment’ and you’ll hear more about it, if you haven’t already.
You will be automatically enrolled yourself, if you are:
- Not already in a suitable pension scheme at work
- Aged 22 or over
- Under State Pension age
- Earning more than £8,105 a year (in 2012/13 tax year)
- Working in the UK.
It’s your employer who will need to enrol you into the pension. It starts with the largest employers (those with over 120,000 employees), but will ultimately become an obligation for all employers (no matter how small) over the coming years. Your employer will be in touch with more details of how it affects you.
What's the minimum contribution?
The minimum contributions will be a total of 8% of ‘band earnings’ (currently between £5,564 and £42,475). This is sometimes referred to as ‘qualifying earnings.’ At least 3% needs to be paid by your employer, and the rest will be made up of your own contribution and tax relief from the Government.
For many, this will simply mean the 8% is made up of:
- 3% from employer
- 4% from employee
- 1% from tax relief
It is estimated that as many as 10 million people will be automatically enrolled, many of whom will be saving for the first time. There are also somewhere in the region of 1 million employers who will set up their first workplace pension scheme - and start contributing towards it.
If you are an employer yourself, it’s worth familiarising yourself with what you’ll have to do. You can speak to your adviser, or have a look at the Pension Regulator’s website.
The sound of the alarm clock can be unpleasant, but we can look forward to the days in retirement when we don’t need to get up quite so early. When those days come, we’ll be glad we saved, and that auto-enrolment itself was a wake-up call to do so.
As with any investment the value of your fund can go up or down and may be worth less than what was paid in. 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.
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