What is Pension Auto-Enrolment?
Auto-enrolment was designed to plug the pension gap – helping ensure all of Britain’s employees are provided for in retirement. But is the scheme working?
Launched in October 2012, starting with the country’s largest companies, auto-enrolment will sign up around 10 million people to workplace pension schemes by 2018.
The Government-led initiative was launched to boost the number of Britons saving into a pension, and ensure they have enough cash in retirement to maintain a comfortable standard of living.
Before auto-enrolment began, seven in 10 private sector workers did not have a retirement savings plan, and risked being plunged into poverty at retirement. The gap between what these workers had and their income needs was coined the “pensions gap” and auto enrolment was designed to plug it by making workplace pension schemes opt out rather than opt in.
Why Do We Need Private Pensions?
As life expectancy grows, so does the number of years Britons will spend in retirement. While the State Pension still promises a base level of income for all pensioners, this is not enough to guarantee a comfortable retirement.
Some economists also predict that the State Pension may be scrapped in the future, as it is a significant burden on the public purse. Auto-enrolment paves the way for this development.
How Does it Work?
When an individual is signed up for a workplace pension through this new scheme, they will automatically begin contributing 1% of their gross annual pay towards their pension. Their employer will match this contribution and the Government will add tax relief. Employees can choose to up their contributions, and this will be matched by the employer up to a pre-agreed cap.
From 2018, when auto-enrolment is fully implemented this minimum will jump to a 3% from the employer. Employees will be required to contribute 4% of their salary and there will be a 1% tax relief from HMRC. There have been concerns raised regarding this arbitrary increment, which may put lower earners off contributing to their pension and choose to opt out.
Who Will Be Automatically Enrolled?
Employers have to automatically enrol workers who fit the following requirements:
– They are not already in a qualifying workplace pension scheme
– They are at least 22 years old
– They are below the state pension age
– They earn more than £8,105 a year
– They work or ordinarily work in the UK
There have been complaints from part-time workers and the self-employed who are unfairly penalised by the auto-enrolment rules. More than six million people have been passed over for auto-enrolment because they were not eligible since it was launched. Of this figure it is estimated that three quarters are women.
These workers do not qualify for auto-enrolment because they earn less than the minimum threshold, are too young – or are older than the state pension age. Because many of these workers are part-time a disproportionate amount of unenrolled workers are woman. Women are more likely to have flexible working hours following childbirth. The lower threshold is currently set at £10,000 until at least April 2015.
Opting In and Opting Out
Prior to October 2012, employees had to consciously opt-in to workplace pensions. With the new rules in place, employees will now have to opt-out.
If an individual does not want to be in a pension scheme, they can choose to opt-out at any point.
According to the Pension Advisory Service website: “You can choose to opt-out of your scheme at any time if you want to. If you opt-out within a certain period (your employer will let you know of the deadline), any payments already made will be refunded, as if you had never joined. If you opt-out after this, the payments already made will not be refunded and will remain in your pension pot.”
Conversely, if an individual does not qualify for automatic pension enrolment, they still have the right to join the scheme if they want. They can ask their employer to include them in the pension scheme and the employer must honour their wishes.
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