UK Pensions: What is Auto Enrolment?
by Joanna Wilkins
What is Auto Enrolment in the UK?
In the past, many workers in the UK missed benefiting from a valuable pension because either their employer didn’t offer them one or if they failed to apply for the company’s pension scheme. Automatic enrolment ensures that this does not happen. Automatic enrolment is an initiative undertaken by the government of the United Kingdom to assist more workers to save money for later life through a pension scheme. By 2018, all employers will have to enrol eligible workers into a workplace pension scheme automatically unless the workers decide to opt out themselves. This will allow more people to save up their earnings to cover for after retirement needs.
Why is Auto Enrolment Happening in the UK?
For a long time now it’s been felt that most people are unable to live comfortably post retirement on just their State pension. With people living longer lives it puts an incredible strain on the State Benefits System. To encourage more workers to save up their income for post retirement life the government has decided to initiate auto-enrolment.
There are some people for example, those who are self employed that don’t qualify for auto-enrolment. However, provisions are being made to allow those who fall outside the eligibility criteria to also join pension schemes.
When are UK Residents Eligible for Auto Enrolment?
Your employer will have to enroll you in a pension scheme irrespective of whether you work full time or part time as long as:
If you fulfill the above criteria then it does not matter if you are working on a short term contract or if you are on maternity leave or if your wages are paid by an agency, auto-enrolment ensures that you are covered.
The Advantages Auto Enrolment is Affording UK Workers
There are two key benefits of auto-enrolment. These include:
It has been recognized that not many people can afford the kind of lifestyle they hope to enjoy post retirement. Auto-enrolment as an initiative strives to ensure that this does not happen anymore.
What UK Residents Can Do if They Don't Wish to be Auto-Enroled
You always have the option of opting out of the pension scheme after you have been enrolled. But doing so will mean that you miss out on your employer’s contribution to the pension as well. Additionally, you will no longer be able to benefit from the tax relief afforded by the government for pension schemes. If you still want out of the workplace pension scheme then ask your employers for an opt-out form. Fill it up and then return it to your employer.
If after a month of being enrolled you decide to opt-out then the payment made to your pension account will be refunded back to you. If you opt-out after a month then the payments will be refunded after your retirement. It’s possible to rejoin your employer’s workplace pension scheme at a later date. Your employer is required to re-enrol you back into the pension scheme every three years by law as long as you are still eligible.
For most people saving via company pension is a great idea especially as the employer is also contributing towards it. However, if you are dealing with unmanageable debt then opting out of auto-enrolment is more advisable.
As a UK Resident How Much Will You Have to Contribute?
There is a minimum amount that has to be contributed by you, your employer and the government in form of tax relief. This minimum amount is set at 2% of your monthly earnings. 0.8% of that is contributed by you, 1% by your employer and 0.2% by the government in the form of tax relief. By 2017/2018 this amount should increase.
However, by April 2018 to March 2019 it should go up to 5%. Your contribution will be 2.4%, 2% from your employer and 0.6% from the government in the form of tax relief. From April 2019 the total minimum contribution will rise to 8% (4% from you, 3%from your employer and 1% from the government) of your income.
The minimum amount or contribution applies to any amount you earn over £10000 up to a limit of £43000. This amount also includes any bonus or overtime payments given to you by your employer. Your employer should let you know about how much you need to contribute every month.
How is Your Pension Protected in the UK?
Here we take a look at what happens to your pension amount under certain scenarios.
If Your Employer Goes Bust
Defined contributed pensions are not usually run by employers rather by pension providers. In such a scenario you would not lose your pension amount.
If Your Pension Provider Goes Bust
If your pension provider was authorised by the financial conduct authority then you will get compensated by the Financial Services Compensation Scheme (FSCS).
There are some defined contribution schemes that are run by a trust. These trusts are appointed by the employer and are known as ‘trust-based schemes’.
In such schemes, you will continue to get your pension even if your employer goes out of business. But you might not get as much as your former amount of pension because the scheme’s running costs will be paid by members’ pension pots instead of the employer.
About the Author
Joanna Wilkins is a financial expert at Secure Facilities, she describes herself as a music enthusiast and animal lover. In her spare time, she enjoys catching up with public affairs and spending time with her favourite fury friend- Jazz the Cat.
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