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Pension automatic enrolment - What does it mean for you?

You may or may not be aware that the government have made ‘auto-enrolment pension’ schemes a legal requirement for all UK employers. This will apply to employees who are aged between 22 and state pension age, earn over £10,000 per year and work in the UK. The new laws mean that every employer must enrol all workers who meet this criteria into a work place pension scheme and contribute to it. 

What is workplace pension for?

Your workplace pension is your way to save for your retirement so that you don’t have to fully rely on state pensions. You may already be part of a work place pension scheme, in which case you may not notice any difference to your scheme. However, if you are not already part of a scheme, your employer should have made you aware of the auto enrolment pension scheme and it will either have started already or will be starting soon. You can find out when your auto enrolment pension scheme start by using this tool. You will need your PAYE reference number in order to use the tool. 

What does it mean to you? 

Having a workplace pension means that you will pay a monthly contribution to your pension pot that will come out of your monthly salary. Your employer will also pay into the pot monthly and the government will provide tax relief which adds to the pot as well. The amount you receive will depend on a number of factors, including the type of pension scheme you are in and whether you were auto enrolled or not. For example, if you are in a defined contribution pension scheme, you may put £40 into the pot each month, your employer puts £30 in and your get £10 tax relief, so the total amount going into your pension pot each month is £80. 

Auto enrolment pensions vs contribution pension schemes

Auto enrolment pensions are different to defined contribution pension schemes. With auto enrolled pensions, a minimum percentage of your ‘qualifying earnings’ (which can be your entire wages before tax or the amount you earn before tax between £5,824 and £42,385 per year) is paid into your pension scheme each month. Your employer will decide what the qualifying earnings are and the minimum contribution you make is 0.8% of your qualifying earnings. This amount will go up to 4% by 2018. The minimum amount your employer contributes is 1% of your qualifying earnings, rising to 3% by 2018. Finally, the government contributes 0.2 of your qualifying earnings, rising to 1% by 2018. These minimum amounts may vary depending on your pension schemes rules and you may be able to pay in more if your employer agrees. 

When you are automatically enrolled into your workplace pension scheme, you will see a slight decrease in your monthly salary due to the outgoing contributions to your pension pot. This may result in your entitlement to tax credits or an increase in the amount of tax credits you get, however you may have to wait until the next tax year to receive this benefit. You may also find that you are now entitled to income-related benefits or an increase in your current benefits. Finally, you may find that your monthly student loan payments (if you have one) are decreased.

It is important to remember that you do have the option to ‘opt out’ of your workplace pension. This must be entirely your own decision with no influence from your employer. You can only opt out of the pension scheme after you have been auto enrolled. You will have one month to opt out from the day your membership to the scheme becomes active and you do this by getting an opt out notice from the pension scheme. You should fill this out and return it to your employer who will be required to issue you with a full refund of any contributions you made during that month. The decision is yours, however it should not be taken lightly. If you can afford to save for your future, it is recommended that you do!