Auto-enrolment – Is it right for me?

Now that auto-enrolment has come into force for the UK’s bigger companies many people will be wondering whether or not to opt out of the scheme offered by their employer.

There are many factors that must be considered by those individuals who are eager to save for their retirement in a rewarding way. Many individuals already do this and are engaged in either a personal pension such as a SIPP or an existing workplace pension scheme. However, vast numbers of workers are not currently saving for their retirement, something which causes difficulties and stress once retirement age has been reached. Therefore, as a means of encouraging people to save for their retirement and in order to provide the infrastructure to do so more easily, the government has introduced auto-enrolment.

In this article the concept of auto-enrolment is investigated and the benefits and weaknesses of remaining within an employer pension scheme are analysed.

What is auto-enrolment?

Auto-enrolment is a government initiative whereby every employee of a company will be automatically enrolled into a workplace pension scheme unless the employee chooses to opt out.

If an individual is aged between 22 and the state pension age, currently 60 for women and 65 for men, (although there are plans to change this to 66 for both women and men in 2018,) is not currently paying into a qualifying workplace pension, and earns more than £8,105 per year then auto-enrolment will apply to them.

When does this happen?

Companies with the following numbers of staff must implement auto-enrolment by the following dates;

v 50-249 members of staff: 1^stApril 2014 – 1^st April 2012

v 30 – 49 members of staff: 1^st August 2015 – 1^st October 2015

v Less than 30 members of staff: 1^st January 2016 – 1^st April 2017

What are the contribution levels?

The minimum legal contributions for auto-enrolment are:

1% from the employer and employee from 2012 to end 2016
3% from the employee and 2% from the employer in 2017
5% from the employee and 3% from the employer from 2018

The government will also contribute to the pension pot in the form of tax relief to the extent of 25% of an employee’s contribution if the employee is a basic rate tax payer.

This means that, between 1/10/2012 to 31/12/2016, if an individual pays in £200 a month, their employer will pay in £200 and the government £50 leaving a total monthly contribution of £450.

It also means that an individual earning the UK’s median salary of £26,200 (Annual Survey of Hours and Earnings – November 2011) who is enrolled in a pension scheme on 1^st October 2012 could receive approximately £6,000 in employer contributions and Government tax relief in their pension pot if they stay enrolled for 10 years. If the employee stayed enrolled for that decade they would contribute an average of £14 pounds per month for the initial year, followed by the average of £15 per month for the subsequent four years and then an average of £78 per month for the final five years. That minimum contribution totals over £5,500 so the employer contribution plus tax relief comes, roughly speaking, to an additional £6,000.

What happens if an individual wants to opt-out?

If an individual already pays into a private pension scheme such as a SIPP, or feels that they cannot afford to pay into a pension then they have the right to ‘opt-out’ of being automatically enrolled. Each individual employer will provide the information about how to do this.

However the decision to opt-out is an important one as once an individual has opted out they will lose out on their employer’s contribution and the governmental tax relief that they would receive on their contribution. The decision to opt out will automatically be reviewed every three years, giving the employee the option to opt in once again.

What are the alternatives?

If an individual wants to save for their retirement but wants to either retain greater control over where and how their pension pot is invested or wishes to keep it separate from their employer’s arrangements then they do have other options available to them.

For example, they may wish to invest in a Self-Invested Personal Pension (SIPP) as this will enable them to control exactly what stocks and shares their pension money is invested in. Alternatively they may wish to invest via a Stocks and Shares ISA to give greater levels of investment freedom while retaining certain tax benefits.

The most successful option will depend upon an individual’s personal circumstances and financial objectives. The value of tax savings and eligibility to invest in a SIPP will depend on individual circumstances and all tax rules may change in the future.

Article written with assistance form Charles Roberts, a UK based IFA of over twenty years standing who, as well as offering financial advice to personal investment and pension clients, also writes for various journals and publications. He recommends finding the best ISA to all of his clients, whatever their age as it is perfect for putting away a lump sum, tax free, while also attracting interest.