Millions of workers in the UK are starting to see a slice of their salary being automatically diverted into a savings pot for their pension; but how much do you really know about the Government’s Pension Automatic Enrolment Scheme?
Here at Sibbalds Financial Services, we have decided to make it crystal clear into what the Scheme is all about, how it will affect you as an employee, or as a business owner and what effect it will have on your current salary.
The Automatic Enrolment Scheme is a saving scheme for retirement organised through an employer. The employer may have their own scheme, offer one through a specialist pension provider, or use a government-backed scheme but all must be suitable for automatic enrolment and meet strict qualifying standards.
A new government pension scheme, NEST (National Employment Savings Trust) has been launched to help, and is available to any employer who chooses to use it or for those businesses who do not plan for a pension scheme and are therefore automatically enrolled in NEST by default.
Who will be enrolled?
Your employer will enrol you into a pension at work if you are aged 22 or over, are under the State Pension age; earn more than £9,440 a year and work in the UK. Part-time workers can also decide to take part, and if they earn more than £5,668, their employer will be obliged to make a contribution also.
However, you do have the option of opting out. People may decide that they need all the money they earn, or they have a private pension policy which will suffice. Staff will be given a letter about the scheme, and can ask for an opt-out form if they wish. This form needs to be filled out within a month for your involvement in the scheme to be cancelled.
When will the system start?
The scheme is being introduced gradually over five years. Large companies with over 6,000 staff have already introduced the scheme, starting in October 2012. Firms with 50 workers or less will not start enrolling their staff until June 2015, but it is worth being aware of and making sure you are ready when the time comes.
The scheme is being regulated by The Pension Regulators, who ensure the system and workers are being enrolled correctly.
How will affect me?
This depends on how much you currently earn. To begin only 1% of your earnings will be deducted for the scheme, with your employer being obliged to add a contribution of 1% and tax relief adding another 0.2%. These amounts however, will increase to a minimum of a 5% contribution from the employee, 3% from the employer, and 1% in tax relief from October 2018.
Where does the money go?
The funds are held until you are 55 years old. Your money is invested, with you being given the choice of where you would like your money to be stored dependent on risk factor. For people who would rather take minimal risk, there will be a default option, which starts very safe. This option tries to make a bigger return during your working middle aged years, before playing it safe once again when you approach retirement age.
How much will I get in return?
One of the main issues with the scheme lies with the difficulty in predicting what sort of pension you will receive when you retire. This is owed to the impact of success on your investment, changes to your earnings, the age of which you retire, and also economical changes.
Many people argue that the resulting pension you receive will not be enough to live on, but this argument has been counter balanced with the notion of introducing a saving scheme forces the individual to think about saving for their future.
To conclude, the Pension Automatic Enrolment Scheme will affect both the employee and employer in different ways. You will see a deduction in your monthly wage packet, and business owners will need to find extra income to cover the cost of matching their employee’s contribution. One thing is certain in that this will happen and will affect all businesses – it is a matter of time only.
If you are a business owner worried about how the Scheme will affect your business, or an employee looking for an answer to a question, please feel free to leave a comment below, or contact us directly at firstname.lastname@example.org or call 01332 242257 and we can put you in touch with one of our qualified independent financial advisors for a free no obligation meeting.
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