Pension Auto Enrolment Commences

December 24th, 2012

The 1st October saw the long-awaited introduction of pension auto-enrolment with a recent burst of TV advertising taking place in Government attempts to raise public awareness of the changes.

Automatic enrolment requires that employers enrol ‘eligible jobholders’ into a qualifying workplace scheme – This could be NEST (National Employment Savings Trust) or another qualifying scheme established by the employer (for example a Group Personal Pension or Occupational Pension scheme, subject to the scheme meeting certain conditions).

Due to the scale of the task at hand to ensure all employer’s meet their obligations the requirement to auto enrol employees is being phased in (referred to as ‘staging dates’), with the largest employers first –  In fact prior to April 2013 only employers with more than 10,000 employees will be affected with the very smallest employers (those with less than 30 employees) not  subject to the requirements until 2017.

How it works

Essentially, employers will be required to enrol all eligible jobholders within a month of their auto-enrolment date into a suitable workplace pension scheme (unless they are already members of such a scheme).  Generally speaking all employees aged 22 or over, earning at least £8,105 per annum will be ‘eligible jobholders’

There are also compulsory minimum contributions required from both employer and employee – although initially these will be low, starting with gross contributions of 1% of pensionable earnings from the employee and 1% of pensionable earnings from the employer, they will gradually rise until employers must contribute 3% with an employee contributing 5% (including tax relief).   These contributions are based on earnings between £5,564 and £42,475 (for tax year 2012/13)

How much pension will this give me?

It is estimated that by 2014 around 4.3 million people will be signed up via auto-enrolment, with hopes that this figure will rise to between 6 and 9 million by the end of 2018*

Despite this it is important to remember that most people will need to be saving significantly more than the minimum contribution rate of 8% to enjoy a decent level of income in retirement.  The table below shows examples starting at different ages with contributions of 8% of qualifying earnings.  In addition we have assumed the following:

  • That male annuity rates apply for this comparison (although unisex rates will be mandatory from 21 December 2012).**
  • An annual salary of £25,000 increasing at 3%
  • Thresholds for the qualifying earnings band of £5,564 to £42,475 increase at 2.5% p.a
  • Annual growth of 4% per annum (after charges) and the final fund value adjusted for inflation which is assumed to be 2.5% p.a.
  • No tax-free cash is taken at retirement and the whole fund is applied to annuity purchase

 

Current Age

Total lifetime contributions (to age

Fund Value (at age 65)  65)

Fund Value (adjusted for inflation)

Annual pension adjusted for inflation**

22

£137,289

£304,452

£179,480

£10,051

35

£75,608

£134,393

£92,327

£5,170

45

£42,370

£63,031

£48,795

£2,733

55

£17,940

£22,178

£19,378

£1,085

So how much do you need to be saving towards retirement?  As a very general rule of thumb, dividing your age by two and contributing this amount as a percentage of your total salary / earnings is often thought to be a reasonable starting point.  So, for example, someone starting to save for retirement at 30 might need to consider saving at least 15% of their salary.  The longer you put off taking action the more you would have to contribute, so a 50 year old may need to consider saving at least 25% of salary…..and consider the last point from another perspective:  someone age 50 looking to retire at 65 would only have around 180 pay days left until retirement!

Clearly, however, the above rule of thumb is not a very scientific nor accurate approach to planning for retirement and the amount you will actually need to put aside will depend on a variety of assumptions including  target retirement income, desired retirement age, and assumed future investment growth to name but a few.

It is therefore important to seek professional advice which takes into account your individual circumstances, existing pension provision, and your retirement goals

*     Source: Department of Work & Pensions

**   Source: www.moneyadviceservice.org.uk/annuities based on comparison/rates as at  11/10/12. Assumes a single life annuity, level, no guarantee period, paid monthly in arrears.