Get ready for compulsory pensions

Are you prepared for the start of auto-enrolment in October, asks Julian Knight

You open your payslip and your salary is less than usual, quite a bit less. This could be you come October when 10 million employees not currently in a workplace pension scheme will be auto enrolled into one.

"Public inertia at the moment works against pension saving with millions failing to join their company pension scheme. But the idea of auto enrolment is to make that inertia actually work in favour of pension saving, so if you do nothing you will start to pay into a workplace scheme of some description," explains David James, an associate at Sackers, the pension's law firm.

Not everyone is going to be immediately auto-enrolled. The biggest employers, best able to cope, are moving first. Between October and February 2014, employers with more than 250 staff will have to auto-enrol. Then in April 2014 to February 2018 smaller employers will follow suit.

If the employer doesn't offer a pension scheme of its own it will have to start enrolling into a third party scheme, the most likely is the government-run Nest but there are private sector alternatives such as NOW: Pensions. It is up to the employer to select which scheme is offered to their employees.

Eventually micro-employers will have to enrol their staff into a pension scheme. The only group to be exempt from this pensions revolution will be the self employed: "A lot of people haven't woken up yet to how many people are going to be impacted by this. If someone is an employee they will find themselves auto-enrolled but if they have, say, a full-time nanny at home, who is over the age of 22 and earns above £8,105 a year, they will have to act as the employer and auto enrol them into a scheme," Mr James adds.

The level of pensions contributions that employees will make depends on the scheme rules. Some schemes insist on staff making quite substantial contributions. There will though, from October, be a minimum standard with, initially, employees contributing 0.8 per cent of salary (rising in 2018 to 4 per cent), employers 1 per cent (rising in 2018 to 3 per cent) and tax relief accounting for another 0.2 per cent (rising to 1 per cent in 2018).

But experts say that although most would be best going with the flow of auto-enrolment some should opt-out at the earliest opportunity, preferably within a month. And it seems these groups come from diverse parts of the earnings spectrum.

"People with expensive debt that needs paying off, for example those who are relying on payday loans or credit cards to survive, may be best getting this in order first. Likewise, people close to retirement who might qualify for means tested benefits – a small pension could push someone over the threshold for a means-tested benefit, but that benefit may be more valuable than the additional pension," says Julian Webb, the head of pensions at fund manager Fidelity.

But Mr Webb adds: "As a general rule, we would say that individuals should think carefully before opting out, not only because they will be giving up free money [employer contributions and tax relief from the government] but also because people are living longer and their retirement income needs are growing, so it is more important than ever to start saving or continue to save for retirement."

Those with very large pension pots – approaching the lifetime limit of £1.5m – should also tread very carefully over auto-enrolment: "If auto-enrolment means they breach this lifetime limit then there could be severe tax consequences. These people are best taking advice and probably opting out within a month."

A larger group of people will be in the middle ground, where opting out is not such an easy decision. For example, someone nearing retirement may find the pension accrued useful but may find that paying down outstanding mortgage debt is even more valuable in the long term. However, there are no hard and fast rules and Logan Anderson from The Pensions Trust says that it's too easy to overstate the numbers who would be best opting out of auto enrolment:

"Just about no one should look to opt-out of auto-enrolment. The reason for this is that the Government is also taking steps to bring in a universal pension, above the level of means-tested benefits, which means that employees on low incomes are no longer penalised for any pensions savings that they've accrued.

"So, any contributions made by employers are, in effect, free pay (albeit deferred to retirement age). Added to this is the fact that employees' own contributions are tax deductible – there is arguably an additional benefit in contributing."

Q&A

What if I don't want to join?

You can opt out but will lose the employer's contribution. To encourage pension saving employers must re-enrol those who have opted out every three years.

Who's eligible?

It is compulsory for every worker aged between 22 and state pension age and earning more than £8,105 (for 2012/13). But people who are not in this group can opt in.

How many will be auto-enrolled?

Ministers say up to 10 million people, with up to eight million people newly saving or saving more in all forms of workplace scheme.