Questions you should ask about the new pension reforms – 14502

1st January 1999

Over the course of the next few years, your employer will have to offer you a workplace pension and contribute to it if you make contributions too. This is a big change from the previous system where employers were only required to offer access to a pension, and in reality many didn’t even do this, despite this being against the letter of the pension regulations. To all intents and purposes until October this year, the decision on whether or not to offer a company pension has been up to your employer. They may have done so for historical reasons, because they saw it as their civic duty, or because they believed it helped them recruit and retain staff. In the next few years however, all employers will be compelled to offer a pension to employees above a certain level of salary set at just over £8,000 a year. Many experts suggest that this amounts to a quiet revolution. The Government is currently running a series of advertisements extolling its benefits starring among others Theo Phaphitis and Karren Brady. In summary, a new system is being introduced where if you pay into a pension plan, your employer must also pay in contributions. This could make a big difference to your retirement if you work for an employer which doesn’t offer a pension at the moment. Between now and 2017 all employers must offer you access to a pension. The ten largest employers such as McDonalds and Tesco’s are already in the system and from next year it is being rolled out across the workforce in order of size of workforce. These dates known as staging dates are listed here on the website of the Pensions Regulator. The required contribution levels start low but then increase to a minimum of eight per cent over the next few years. Your employer will be required to pay in three per cent, you will need to pay in four per cent and the Government will provide one per cent. There are a huge number of issues for you to consider about this new system. The biggest question is whether you pay in at all, because you are not being forced to join any scheme. However you will be enrolled in a scheme unless you actively opt out and you must opt out every three years or you will be enrolled. This system is known as auto-enrolment or soft compulsion because it is compulsory on your employer. Mindful Money is going to return to this subject regularly but for the moment, we are going to suggest a few questions you might ask. The biggest question is one you need to ask yourself which is whether you can afford to contribute to the pension. It is likely to be worth your while because of the all important employer contribution but you will be contributing four per cent of your salary. If you can’t afford to lose that you may wish to opt out. You may wish to ask your employer about its plans for auto-enrolment including when it starts and which pension provider the money is to be invested, a decision that is up to the employer. They could select a private sector pension company and the government has also set up a semi-state provider known as the National Employment Savings Trust or Nest for short for those employers who don’t want to use a private sector firm. You will probably be offered a selection of funds to invest in, and you need to consider which suits you best or you will be placed in what is known as the default fund. Your employer may offer you access to advice and information and you should ask if this is available and from who. If you already have a pension provided by your employer then you should check to see what plans your employer has for it. If it reaches a certain standard then it may comply with the new Government requirements. However one potential downside of the new scheme is the possibility that more generous schemes, i.e. ones where the employer provides more than four per cent may be reduced to the level new state requirements something the pensions industry has described as ‘dumbing down’. If that is the case, you may want to consider what it means for your retirement plans. Finally if you already have a personal pension or other long term investment plans, you mi,ght wish to adjust these accordingly but it is a very good idea to seek financial advice before changing anything. The Government hopes that the new system will get many millions of people into the habit of saving for retirement. Whether that happens or not, it is important that you individually start actively thinking about the issue, because if you don’t do anything, then under auto-enrolment the decision will be made for you.

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