From 1st October, hundreds of thousands of people were automatically signed up to pension schemes by their employers, in what is being described as the biggest shake-up of the system in decades.
The new legislation is designed to supplement the current state pension and to stem the drastic decline in workers' pension provision. Automatic enrolment aims to tackle growing concerns about an old-age poverty crisis, as people live for longer but fail to put enough away for their later years. Recent official figures show that the number of private sector workers paying into a pension is at its lowest since records began in 1953.
Initially, staff at the UK's biggest firms will have started to be automatically enrolled in a workplace pension, into which both they and their employers will pay. The process of recruitment will be staggered over the next few years until 2018. The smallest employers will begin auto-enrolment of their staff in January 2015.
At the same time, contribution levels will rise slowly, to avoid giving either staff or their firms an unwelcome financial jolt while the economy is still in recession. Contributions will start with staff paying in a minimum of just 0.8% of their pensionable earnings. On top of that employers will have to pay in 1% of their employees' pensionable earnings, with tax relief contributing another 0.2%.
These contribution levels will eventually rise to 4% from the employee, 3% from their employer and 1% in tax relief, giving a total of 8%.The contributions will be invested and then when the employee retires, currently at 55 at the earliest, they will have to buy an annual pension, or annuity, with their accumulated pot.
Staff will either join their existing employer's scheme, if it meets certain criteria, or one of the new group schemes that employers can adopt, such as the National Employment Savings Trust (Nest).
Workers not already in a company pension scheme will be enrolled if they are aged between 22 and the state pension age, however, these workers must be earning at least £8,105 a year. The contribution they, and their employers, make will be based on their wage, although the first £5,564 a year they earn will not be taken into account. Any earnings above £42,475 will also be ignored in the contribution calculation, so the amount between £5,564 and £42,475 is known as their pensionable pay. However, workers can choose to opt out of the scheme. *
Brunsdon’s Employee Benefits Manager Seb Merritt said, ”Auto-enrolment is a massive challenge for most firms. The largest companies, such as the big supermarkets and banks have already had to start the process. Whilst smaller firms have a little longer to get ready, I would advise any company that has not begun to prepare to start now. There are considerable cost implications, such as compulsory contributions and the increased level of administration, and they need to plan for this well in advance. At Brunsdon we have a dedicated specialist Employee Benefits team with all the facilities at our disposal to help employers address this issue.”
For further information or to obtain our free guide to Auto-Enrolment, please e-mail firstname.lastname@example.org
*Source: BBC News and The Telegraph, 1 October 2012