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.

Independent Partners: 10 top tips for retirement. Get your free guide here

Arts and Entertainment
Attenborough with the primates
tvWhy BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter
News
Campbell: ‘Sometimes you have to be economical with the truth’
newsFormer spin doctor says MPs should study tactics of leading sports figures like José Mourinho
Sport
football
Life and Style
Agretti is often compared to its relative, samphire, though is closer in taste to spinach
food + drink
News
Kelly Osbourne will play a flight attendant in Sharknado 2
people
News
Down-to-earth: Winstone isn't one for considering his 'legacy'
people
News
The dress can be seen in different colours
i100
Sport
Wes Brown is sent-off
football
Voices
Lance Corporal Joshua Leakey VC
voicesBeware of imitations, but the words of the soldier awarded the Victoria Cross were the real thing, says DJ Taylor
Life and Style
Alexander McQueen's AW 2009/10 collection during Paris Fashion Week
fashionMeet the collaborators who helped create the late designer’s notorious spectacles
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    SThree: HR Benefits Manager

    £40000 - £50000 per annum + pro rata: SThree: SThree Group have been well esta...

    Recruitment Genius: Office Manager / Financial Services

    £30000 - £37000 per annum: Recruitment Genius: Established in 1999, a highly r...

    Jemma Gent: Year End Accountant

    £250-£300 Day Rate: Jemma Gent: Are you a qualified accountant with strong exp...

    Jemma Gent: Management Accountant

    £230 - £260 Day Rate: Jemma Gent: Do you want to stamp your footprint in histo...

    Day In a Page

    War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

    The battle for Mosul will unleash 'a million refugees'

    Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn
    Yvette Cooper: We can't lose the election. There's too much on the line

    Yvette Cooper: We can't lose the election. There's too much on the line

    The shadow Home Secretary on fighting radical Islam, protecting children, and why anyone in Labour who's thinking beyond May must 'sort themselves out'
    A bad week for the Greens: Leader Natalie Bennett's 'car crash' radio interview is followed by Brighton council's failure to set a budget due to infighting

    It's not easy being Green

    After a bad week in which its leader had a public meltdown and its only city council couldn't agree on a budget vote, what next for the alternative party? It's over to Caroline Lucas to find out
    Gorillas nearly missed: BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter

    Gorillas nearly missed

    BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter
    Downton Abbey effect sees impoverished Italian nobles inspired to open their doors to paying guests for up to €650 a night

    The Downton Abbey effect

    Impoverished Italian nobles are opening their doors to paying guests, inspired by the TV drama
    China's wild panda numbers have increased by 17% since 2003, new census reveals

    China's wild panda numbers on the up

    New census reveals 17% since 2003
    Barbara Woodward: Britain's first female ambassador to China intends to forge strong links with the growing economic superpower

    Our woman in Beijing builds a new relationship

    Britain's first female ambassador to China intends to forge strong links with growing economic power
    Courage is rare. True humility is even rarer. But the only British soldier to be awarded the Victoria Cross in Afghanistan has both

    Courage is rare. True humility is even rarer

    Beware of imitations, but the words of the soldier awarded the Victoria Cross were the real thing, says DJ Taylor
    Alexander McQueen: The catwalk was a stage for the designer's astonishing and troubling vision

    Alexander McQueen's astonishing vision

    Ahead of a major retrospective, Alexander Fury talks to the collaborators who helped create the late designer's notorious spectacle
    New BBC series savours half a century of food in Britain, from Vesta curries to nouvelle cuisine

    Dinner through the decades

    A new BBC series challenged Brandon Robshaw and his family to eat their way from the 1950s to the 1990s
    Philippa Perry interview: The psychotherapist on McDonald's, fancy specs and meeting Grayson Perry on an evening course

    Philippa Perry interview

    The psychotherapist on McDonald's, fancy specs and meeting Grayson Perry on an evening course
    Bill Granger recipes: Our chef recreates the exoticism of the Indonesian stir-fry

    Bill Granger's Indonesian stir-fry recipes

    Our chef was inspired by the south-east Asian cuisine he encountered as a teenager
    Chelsea vs Tottenham: Harry Kane was at Wembley to see Spurs beat the Blues and win the Capital One Cup - now he's their great hope

    Harry Kane interview

    The striker was at Wembley to see Spurs beat the Blues and win the Capital One Cup - now he's their great hope
    The Last Word: For the good of the game: why on earth don’t we leave Fifa?

    Michael Calvin's Last Word

    For the good of the game: why on earth don’t we leave Fifa?
    HIV pill: Scientists hail discovery of 'game-changer' that cuts the risk of infection among gay men by 86%

    Scientists hail daily pill that protects against HIV infection

    Breakthrough in battle against global scourge – but will the NHS pay for it?