Auto-enrolment is coming – why would you want to opt out?

With a few exceptions, the Government's new scheme to encourage retirement saving should be a good deal. Chiara Cavaglieri reports

Pension saving is at an all-time low with fewer than three million people currently paying into a workplace pension, the lowest number since records began in 1953.

The Government's solution is to put workers into a pension scheme by default, requiring them to actively opt out if they decide they don't want to save. This could be the ideal antidote to our national apathy towards pensions, but tomorrow the largest UK employers are due to launch auto-enrolment, and with many employees still confused, there are some serious concerns.

First of all, an astounding 90 per cent of people in the UK don't know how auto-enrolment pension contributions will be invested, according to a new survey by the pension provider Friends Life. Worryingly, 60 per cent admitted they did not know what auto-enrolment was, with a further 27 per cent saying they are unsure whether they will be auto-enrolled by their employer.

Auto-enrolment has staggered start dates depending on the size of your company, with large employers (at least 120,000 staff) kicking things off this week, although they can delay this by three months. The smallest firms have until 2018 to enrol their staff so there is time to ensure you know exactly how auto-enrolment works and whether it is the right option for you.

Generally speaking, auto-enrolment is a no-brainer – opting out is essentially refusing free money from both your employer and the Government. Initially, under auto-enrolment rules, minimum contributions are set at just 2 per cent, with 0.8 per cent coming from employees, 1 per cent from employers and 0.2 per cent in tax relief from the government.

Pension contributions are paid gross of tax so for a basic-rate taxpayer, each £1 contributed will cost you 80p from your pay packet, before being topped up to £2 by your employer. By 2018, workers must contribute at least 4 per cent and employers will add a further 3 per cent, bringing the total to 8 per cent, when tax relief is included.

"For people on low and middle incomes, if an employer is offering contributions you should be grabbing it with both hands," says Simon Webster at the independent financial adviser Facts & Figures. "If you've got to save in any event and an employer is putting in a significant amount, you would be insane not to take it."

Employer contributions and tax relief are certainly huge incentives, but it is important to keep in mind that pensions are just one way to save for retirement – and a fairly inflexible one at that. For many workers, particularly those who have large debts and have perhaps seen retirees disappointed by stock market falls and low annuity rates, pensions are a difficult sell.

Dr Ros Altmann at Saga argues that auto-enrolment should be about encouraging saving, not just selling pension products.

"If people are not keen on pensions, that does not mean they should not save. There are other valid forms of saving that we need to encourage – such as repaying student debt, or saving to buy a house," she says. "Policy seems to believe that, when it comes to encouraging workplace savings, it has to be pensions or nothing. That will leave many with nothing."

Older people on low incomes may be wary of auto-enrolment. The current means-tested pension credit system is so complex that it can be tricky to calculate whether workers are always better off saving. If people are to be pushed into saving for their retirement with a workplace pension, they need to be absolutely sure that they will be better off by doing so. People with small pension pots may want to opt out too if they lose the right to take them as a lump sum under so-called "trivial commutation" rules.

Danny Cox at Hargreaves Lansdown explains: "Those over 60 with pension pots of £18,000 [the current limit for this tax year] or less can use the triviality rules to take the whole of their pension fund as cash, 25 per cent tax free, 75 per cent taxable. If auto-enrolment pushed their savings above £18,000 they would not be able to do this."

Anyone who has already accrued an enviable pension pot will also have to tread carefully, as those with pension savings above the lifetime allowance (currently £1.5m) face a 55 per cent pension excess charge when the benefits are realised. This applies only to the excess above £1.5m, not the whole pension, and the combination of employer contributions and tax relief at the higher tax rate should mean that enrolment is still worthwhile.

The exception here, however, is if you took out fixed or enhanced protection in the past. When the lifetime allowance was introduced in April 2006, those affected were able to opt for enhanced protection against any future lifetime allowance charge, on the proviso that no further contributions were made. Similarly, when the lifetime allowance was reduced from £1.8m to £1.5m last year, people were able to apply for fixed protection which meant they could freeze the higher allowance at £1.8m, again on the condition that not a single penny more is put into any pension funds.

So if someone failed to opt out of auto-enrolment and lost their fixed protection it could result in a hefty tax bill of up to £165,000 (55 per cent of the difference between £1.8m and £1.5m).

And if you do decide you want to opt out be prepared for an ongoing battle. Initially, you have one month after being automatically enrolled to leave the scheme, but employers are required to reapply the auto-enrolment every three years – which means that if you are determined not to have a workplace pension you will have to actively opt out once every three years.

Suggested Topics
Jennifer Lawrence was among the stars allegedly hacked
peopleActress and 100 others on 'master list' after massive hack
Radamel Falcao
footballManchester United agree loan deal for Monaco striker Falcao
Louis van Gaal, Radamel Falcao, Arturo Vidal, Mats Hummels and Javier Hernandez
footballFalcao, Hernandez, Welbeck and every deal live as it happens
people'It can last and it's terrifying'
Have you tried new the Independent Digital Edition apps?
A man shoots at targets depicting a portrait of Russian President Vladimir Putin, in a shooting range in the center of the western Ukrainian city of Lviv
voicesIt's cowardice to pretend this is anything other than an invasion
Arts and Entertainment
Alex Kapranos of Franz Ferdinand performs live
music Pro-independence show to take place four days before vote
Arts and Entertainment
booksNovelist takes aim at Orwell's rules for writing plain English
Arts and Entertainment
The eyes have it: Kate Bush
Finacial products from our partners
Property search
Money is slipping through our fingers: the UK is falling behind other countries in the amount we put away

How to save money: UK is crashing down the European league table for putting money away

The UK has slipped to 11th in the latest European league table of savers. Rob Griffin checks out the best options

Energy firms found guilty of bad practice could have licences revoked under Labour government

Caroline Flint, the shadow energy secretary, says a Labour government would create a new energy regulator

A student's guide to financial survival: You don't have to drown in debt at university

Fresh from A-level delight, the moment does not have to be soured by students resigning themselves to thousands of pounds worth of debt in three years' time. Rob Griffin sees how to pass the university challenge

'Dismal' eurozone data sparks concerns

European Central Bank chief Mario Draghi is under pressure to launch promised stimulus before the EU slides further
Love but not marriage: property is one area where cohabiting couples are in danger of losing out

How couples can protect their financial interests when cohabiting

People who simply live together cannot assume they have the same rights to each other's assets as spouses or civil partners. Michelle McGagh sees how they can protect their financial interests

India could be jewel in the crown for investors

With a new government and an ambitious prime minister, the country offers the prospect of strong returns. But there may be hiccups ahead, warns Simon Read

Child Maintenance Service to replace Child Support Agency - but is it better?

Reforms to the vexed question of child support payments by absent parents mean extra charges for both sides. Neasa Macerlean reports

Barclays's new life insurance heralds a revolution on the high street

The new product marks a shift towards 'clear, straightforward and standardised' banking products, says Simon Read

How to protect your assets if the stock markets begin to head south again

Are you worried about your portfolio? Nick Paler asks fund managers and investment insiders for advice
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Senior Asset Manager

    £70000 - £75000 Per Annum: The Green Recruitment Company: Katie Robinson +44 (...

    Application Support Analyst / Junior SQL Server DBA

    £40000 - £45000 per annum: Ashdown Group: An established professional services...

    Trainee Recruitment Consultant - Birmingham - Real Staffing

    £18000 - £23000 per annum + Commission: SThree: Real Staffing are currently lo...

    Business Development Manager / Media Sales Exec

    £28 - 32k + Uncapped Commission: Guru Careers: A Business Development Manager ...

    Day In a Page

    Alexander Fury: The designer names to look for at fashion week this season

    The big names to look for this fashion week

    This week, designers begin to show their spring 2015 collections in New York
    Will Self: 'I like Orwell's writing as much as the next talented mediocrity'

    'I like Orwell's writing as much as the next talented mediocrity'

    Will Self takes aim at Orwell's rules for writing plain English
    Meet Afghanistan's middle-class paint-ballers

    Meet Afghanistan's middle-class paint-ballers

    Toy guns proving a popular diversion in a country flooded with the real thing
    Al Pacino wows Venice

    Al Pacino wows Venice

    Ham among the brilliance as actor premieres two films at festival
    Neil Lawson Baker interview: ‘I’ve gained so much from art. It’s only right to give something back’.

    Neil Lawson Baker interview

    ‘I’ve gained so much from art. It’s only right to give something back’.
    The other Mugabe who is lining up for the Zimbabwean presidency

    The other Mugabe who is lining up for the Zimbabwean presidency

    Wife of President Robert Mugabe appears to have her sights set on succeeding her husband
    The model of a gadget launch: Cultivate an atmosphere of mystery and excitement to sell stuff people didn't realise they needed

    The model for a gadget launch

    Cultivate an atmosphere of mystery and excitement to sell stuff people didn't realise they needed
    Alice Roberts: She's done pretty well, for a boffin without a beard

    She's done pretty well, for a boffin without a beard

    Alice Roberts talks about her new book on evolution - and why her early TV work drew flak from (mostly male) colleagues
    Get well soon, Joan Rivers - an inspiration, whether she likes it or not

    Get well soon, Joan Rivers

    She is awful. But she's also wonderful, not in spite of but because of the fact she's forever saying appalling things, argues Ellen E Jones
    Doctor Who Into the Dalek review: A classic sci-fi adventure with all the spectacle of a blockbuster

    A fresh take on an old foe

    Doctor Who Into the Dalek more than compensated for last week's nonsensical offering
    Fashion walks away from the celebrity runway show

    Fashion walks away from the celebrity runway show

    As the collections start, fashion editor Alexander Fury finds video and the internet are proving more attractive
    Meet the stars of TV's Wolf Hall... and it's not the cast of the Tudor trilogy

    Meet the stars of TV's Wolf Hall...

    ... and it's not the cast of the Tudor trilogy
    Weekend at the Asylum: Europe's biggest steampunk convention heads to Lincoln

    Europe's biggest steampunk convention

    Jake Wallis Simons discovers how Victorian ray guns and the martial art of biscuit dunking are precisely what the 21st century needs
    Don't swallow the tripe – a user's guide to weasel words

    Don't swallow the tripe – a user's guide to weasel words

    Lying is dangerous and unnecessary. A new book explains the strategies needed to avoid it. John Rentoul on the art of 'uncommunication'
    Daddy, who was Richard Attenborough? Was the beloved thespian the last of the cross-generation stars?

    Daddy, who was Richard Attenborough?

    The atomisation of culture means that few of those we regard as stars are universally loved any more, says DJ Taylor