You have probably seen the government’s ‘I’m in’ campaign about workplace pensions and auto enrolment. The good news is – it’s about to be your turn. This Q&A is designed to tell you about pensions and auto enrolment and what it means to you.
What is a pension?
A pension is a very tax-efficient way to save for your retirement. You get tax relief at your highest marginal rate on the money you save, most of the returns you get are paid free of income and capital gains tax, and you can get a tax free lump sum of up to 25% of the value of your pot when you retire.
The money you save is locked away until you are at least 55 (unless you are diagnosed with a terminal illness) and the way it is invested is designed to give you a sum of money you can use to fund your retirement.
Why do I need a pension?
For 2016/17, the full new state pension for men born on or after 6 April 1951 and women born on or after 6 April 1953 is currently £155.65* per week. If you currently earn more than that, it means your income will drop when you retire. For many people, there will be a big difference between the money you take home now and the income you will have in retirement. Saving some of the money you earn now into a pension will provide you with an additional income when you retire. *Source: HM Treasury
What is auto enrolment?
By law, every employer has to automatically enrol most of their employees into a pension scheme. For example, employers staging in 2016/17 will have to automatically enrol anyone aged between 22 and State Pension age who earns more than £10,000 per year (the equivalent of £833 per month or £192 per week) into a workplace pension. If you are auto enrolled, you do not have to do anything and you will automatically start making contributions to it straight from your pay packet.
Will I be automatically enrolled into a pension?
The government has created three categories of workers with different rights. These categories are: eligible jobholder, non-eligible jobholder and entitled worker. Many people will be ‘eligible jobholders’ which means they are aged between 22 and State Pension age and earn more than £10,000. All ‘eligible jobholders’ will be automatically enrolled into the pension scheme. Even if you are not automatically enrolled you can still join the pension if you want to, as long as you are under age 74.
By law, every employer will have to automatically enrol most of their employees into a pension scheme from a given date.
What happens if I am automatically enrolled?
If you are automatically enrolled, your employer will start to take contributions from your salary and will also make contributions on your behalf. Both the employer and employee contributions will be paid into a pension scheme on your behalf. We will write to you before this happens to tell you when the contributions will start. The contributions payable are shown below.
To 31 March 2018
Employee Contribution – 1%
Employer Contribution – 1%
Total Minimum – 2%
To 31 March 2019
Employee Contribution – 3%
Employer Contribution – 2%
Total Minimum – 5%
1 April 2019 onwards
Employee Contribution – 5%
Employer Contribution – 3%
Total Minimum – 8%
Can I increase my contributions?
You can increase your contributions by opting to pay a higher percentage of your Salary. If you can afford to do so, you should consider doing this because the more you pay into your pension pot, the more income you will get in retirement.
Are there any tax implications?
Pensions are very tax efficient but very high earners and people who already have very large pension pots may wish to seek professional tax advice because there are rules limiting the amount of contributions on which you can receive tax relief and the amount you can accumulate tax-free.
What will my pension be worth when I retire?
The amount you get will depend on how much you contribute, how well your investments perform, and how you choose to use your pension pot to give you an income. The most important factor is the amount you contribute so if you can afford to pay more, you should consider doing so.
I can’t afford to pay into a pension what should I do?
If you can’t afford to join the scheme now, you can opt out within 30 days of receiving your enrolment notification and any contributions you have paid will be refunded. Your employer has to re-enrol any Eligible Jobholders who opt out on a specific date every three years so if you opt out now you will be automatically enrolled again later.
If you decide to leave the pension scheme more than 30 days after receiving your assessment letter, you can do so. Any pension contributions that have been paid will remain invested in your own pension pot until you retire.
Can I choose how my pension is invested?
A default fund is designed to be suitable for the majority of scheme members. If you prefer to choose your own investment strategy, you will have a range funds available for you to select from or combine to make your preferred asset allocation.
What will I be charged?
The charges you pay are capped by the government and cover the costs of running the scheme.
The amount of charges collected depends on whether you are paying into the scheme (an ‘active’ member) or whether you have stopped paying into the scheme (a ‘deferred’ member) and how much you earn.
I already have a pension can I combine them?
You can normally transfer an existing pension pot into the pension, although you will usually need to get professional advice before doing so; transfers from pension schemes that include any contracted out benefits are not permitted. You can’t ask your employer to make contributions into another scheme, only this one.
If you have any further questions about how auto enrolment will affect you, please contact CBW’s auto enrolment department by emailing: email@example.com
*Information in this article is valid until 1st April 2017