MILLIONS of workers will be paying into a workplace pension for the first time over the coming years following the launch earlier this month of automatic enrolment. But while a workplace pension can help kick-start your retirement savings, experts say the onus is still on employees to make the best of the new scheme. John Mortimer, director of Shepherd and Wedderburn Financial, sets out his tips on taking advantage of workplace pensions.
Are you eligible?
Auto-enrolment targets all employees aged from 22 up to state pension age. Your earnings must be above the minimum level (currently set at £8,105 a year, but this is likely to change each year). If you meet these criteria you will be automatically enrolled into your employer’s pension scheme or, if it doesn’t have one, the government’s new National Employment Savings Trust (Nest). If you do not qualify, are aged between 16 and 75 and have earnings between £5,564 and £42,475 you can elect to opt in and still benefit from your employer’s contribution. If in doubt, ask!
When will you be enrolled?
Only the biggest employers started automatically enrolling employees into their pension schemes this month, with the remainder given staging dates by when they must start complying with the new rules. The staging dates vary depending on the size of the workforce, starting with the largest and working down to the smallest. Your employer should have told you by now when you’ll be affected. If it hasn’t, ask for information.
How much should you pay in?
You will have a minimum payment to make if you want to benefit from your employer’s contribution. This starts at 0.8 per cent of earnings and increases over the next five years to 3 per cent. At that point you will be receiving a 1 per cent Government tax relief payment plus an employer payment of 3 per cent, making a total contribution of 8 per cent. Be careful, because these percentages may only apply to earnings between £5,564 and £42,475, known as “band” earnings. If your total contributions are not based on your total earnings then you may wish to consider making a higher payment.
Only a start
Auto-enrolment is an attempt to ease people into saving for their retirement rather than provide a solution to the problem. Employees will need to make other provisions or pay more into their pension if they want a better income in retirement. The Government envisages that in 20 years’ time about one quarter of the population will be over the age of 65. It wants employees to take more responsibility for their income when they retire and sees auto-enrolment as the starting point.
Review your finances
This is an ideal time to reappraise your financial plans. Ask yourself whether, if you were retiring now, you could you live off the state pension of £5,587 a year. Some advisers can run cashflow models to show you what amount of savings you need to put away to meet your retirement expenditure, taking into account future inflation.
Add to the mix
If you are contributing the minimum 4 per cent of earnings and benefiting from the extra 4 per cent from your employer and the government, think about building up a stocks and shares individual savings account (Isa) as well. Isas can complement your pension income when you retire because income from an Isa is not liable to tax.
Don’t delay
The earlier you start saving, the better your income will be when you retire. Putting things off this will exacerbate the situation. Getting used to a regular pension payment is an excellent discipline and you will reap the reward of this later in life.
Don’t ignore your debts
When considering how much to pay into a workforce pension, don’t immediately give up or reduce repayments of a loan or other form of credit. It may be better to deal with this debt first before committing to a new outgoing towards your pension. Take a balanced view and if in doubt seek advice.
Ignore the doomongers
Too many people are burying their head in the sand and refusing to take up any form of saving. It may take a while because less than 50 per cent of the workforce is saving into a pension, but this will change with auto-enrolment. As the baby boomers reach retirement and more and more are in receipt of a state pension, the only route left for future generations is for them to take control and make their own retirement provision.
Don’t panic
Treat workforce pensions as a positive event and review your own financial position. Where possible, benefit from the generous employer contributions and income tax relief. After all, these payments are all going towards the pot of money that will provide you with an income when you retire.