30th January 2013
The new system of workplace pensions otherwise known as auto-enrolment means if you earn anything but a very low salary, your employer must offer you access to a pension and pay contributions unless you decide to opt out of the system. You are free to opt out, but if you want to receive employer contributions of a minimum of three per cent of salary, you must put in a minimum of four.
Crucially, the employer picks the pension provider, which, provided it meets certain criteria, may be an established pension firm, one of several new firms, or in many cases Nest.
Nest is expected to manage a lot of schemes particularly for firms with lower earning workforces and large numbers of seasonal workers where the private sector may not believe they can provide pensions cost-effectively and still make money.
If you are wondering if you are one of those affected by the reform and when, it includes those aged over 22 and below state pension age, working full or part-time in the UK, not currently saving in a qualifying workplace pension scheme and earning above a minimum level. This minimum is currently £8,105 for the 2012/13 tax year and will be reviewed by the Government every year. The Government is proposing raising the minimum level to £9,440 for the 2013/14 tax year.
That means that if you earn more than this amount and your company hits its staging date – based on workforce size, you should be opted into the new pension system. Here is a list of staging dates from the website of the Pensions Regulator so you can check when your employer may have to sign up.
Initial contributions are just two per cent in total with one per cent from you, but this will increase up to the required minimums – three from your employer – four from an employee and one from the Government by 2017.
But if you are wondering what everyone else is thinking about the reform, here are some of Nest’s findings.
Sixty-eight per cent of people working in the private sector do not contribute to a pension.
The average salary for this unpensioned group is £20,000 a year compared with £30,000 a year for those who do.
Almost a third of the unpensioned group are under the age of 30.
Two thirds of the target market are men because many women fall under the minimum limits because they are in poorly paying jobs and/or work part-time.
Just 14 per cent of people think that their current plans are adequate.
Sixty three per cent agree with the idea of auto-enrolment.
The report also notes the findings from the Department for Work and Pensions suggesting that 70 per cent will stay opted in, 15 per cent will opt out and 15 per cent remain undecided.
So those are some of the stats but we have a couple of questions you might ask your employer and one you might ask yourself.
First if you don’t have access to an employer pension yet, what sort of provider will your employer select? Is Nest appropriate? One pension firm Aegon this week argued that Nest was not appropriate for better off workers because its safety first investment strategy would not secure enough returns.
Second if your employer is offering you a pension already does this change with auto-enrolment? There are some concerns that because of the extra cost of extending pension coverage some employers may cut contributions for everyone. They may even run dual schemes – one for those already enrolled, and another for the auto-enrolment population in the workforce. You need to be aware of what choices are, if indeed you are presented with a choice.
For now, if you are not enrolled for a couple of years, you might also consider whether you want to start saving for a pension now or put some money in an Isa, because every year you wait, the more difficult it is to secure a decent retirement income.
Finally if you are now able to access a workforce pension for the first time, complete with employer contributions, what does it mean for the rest of your finances? Will you cut contributions into other plans? In the next few weeks and months, we’ll be asking the experts about what this all means in more detail.
Finally Nest has issued a list of new employers who will be using it as pension provider below.
Brook Street (UK) Limited
Iceland Foods Ltd
The Midcounties Co-operative
Mitchells & Butlers
RWE Npower plc
Staffline Group plc