Auto-enrolment pensions

These days joining a pension is easier than ever. If you’re at least 22 years old, earning £10,000 a year or more and have not reached State Pension age then you are eligible for auto-enrolment into a workplace pension scheme. Let’s explain what being auto enrolled means. It really is a good thing!

  • The great news is that your employer must pay money into your pension (essentially free money for you!)
  • Your employer is legally obliged to enrol you as a member of their workplace pension scheme
  • Your pension contributions are taken out before you receive your pay, making it easier to get into the savings habit
Auto-enrolment pensions

How much must be paid into my auto-enrolment pension?

The government decides the minimum amount of payments that must be made by your employer, and by you too. The current minimum payment is 8% of a portion of your earnings, with at least 3% being paid by your employer and the balance of 5% made up by you and tax relief.

If lady luck is on your side then your employer will pay the whole amount on your behalf, but either way staying enrolled in your workplace pension makes perfect sense now and in the long term.

Can I pay in more

You can pay in a little extra whenever you like, whether it’s direct from your pay or as a cash sum as and when you choose. If you can manage extra each month, it can make a significant difference. As an example, if a 30-year-old saved an extra £5 per week from their pay, then at aged 65 they would have an extra £25,5541 of savings. For not much more than a weekly posh coffee you could really give your pension some extra froth.

If you notice that you and your employer already pay in higher contributions to your pension this could be because they use basic salary, or perhaps include bonuses as the basis for the payments. Have a chat to your employer if you want to know more.

What tax-relief do I get?

If you are a basic rate tax payer you get 20% tax relief. So, for every £80.00 you contribute to your pension the government will top it up by £20.00. If you’re a higher or additional rate tax payer then you get a higher top up. Getting tax back is a feel-good factor for everyone and the great news is that pensions deliver on this better than virtually every other type of savings plan or investment.

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Why should I stay in my auto-enrolment pension scheme?

You are unlikely to regret having a healthy pension pot and a comfortable retirement income. A pension is still one of the best ways of saving for your later life when you can kick back and relax, start a new career or seek out those new avenues you have been meaning to explore for ages.

The fact that your employer must pay into your pension and the government puts some money in as well by giving you tax relief on what you pay in is double good news. It’s also important to remember that your savings grow virtually free of tax in your pension too.

Why was auto-enrolment introduced?

We’re generally living longer, healthier lives these days and that’s good news. As a result, the government introduced auto-enrolment to improve saving levels throughout the country and to encourage people to think about and contribute towards a pension. This should help more people than ever to have a better income when they reach retirement. And more income means having the freedom to choose the kind of retirement you would like.

Auto-enrolment pensions

Can I opt out of auto-enrolment?

It’s possible to do this when you are first enrolled, or at any stage afterwards. You’ll need to think carefully about doing it though as your employer is paying in free money for you and that’s very valuable. If you opt out then you have to be legally re-enrolled after 3 years, but most employers are flexible and will allow you to rejoin at any time if you need to take a short break.

What sort of pension will I get through auto-enrolment?

Companies use a wide selection of pension schemes to auto enrol their employees and generally it is the company, sometimes with help from their advisers, that chooses the scheme and the provider.

Your pension scheme could be one where the money you and your employer pay in is invested. The size of your pot then depends how much has been contributed and how well your investments have performed. These schemes are known as money purchase, or defined contribution (DC) pensions. Alternatively, your pension may be the type where contributions are paid in the same way as outlined above. The difference is that you receive a guaranteed income depending on how many years you have worked for the company and your earnings at retirement, or in the years leading up to it. These schemes are known as final salary or defined benefit schemes. That’s the jargon done. Over and out!

All types of auto-enrolment schemes have to satisfy certain quality standards. The costs that you are charged for managing your pension are capped to give you value for money, which could mean you have more savings to live on when you retire. An investment fund has to be available so that your contributions can be invested, but you are free to make your own choices if you want to.

Which organisations offer auto-enrolment pension schemes?

Several house-hold name insurance companies offer auto-enrolment pension schemes. With millions of workers becoming pension members for the first time some new organisations entered the market to deal with the demand, so there’s lots of choice out there. These new providers include:

1Based upon £25.00 per month with tax relief and investment growth of 5% per annum. The pension plan charges are a one-off charge of 5% on set up and 0.5% per annum.

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