October pension changes - what you need to know
Saving for retirement has just got easier with the introduction of a new pensions rule of auto-enrolment. The regime, which was rolled out on 1 October, will see employees automatically become members of a pension scheme rather than having to choose to join it. To get to grips with the new system, here we drill down the five basic points.
ONE: CONTRIBUTION LEVELS
Employees and employers are required to pay into schemes. The minimum level is initially 1% of salary for the employer and 1% for the employee but these levels will be ratcheted up to 3% and 4% respectively from October 2018. This, with the tax relief available to the employee, will mean a minimum overall contribution of 8%.
It's important to note that the contribution isn't based on your full salary. Instead, it applies to your salary between lower and upper earnings limits, which are £5,564 and £42,475 this tax year.
Although minimums are set, there is some flexibility about contributions, as Alistair McQueen, workplace savings manager at Aviva, explains: "An employer or employee can pay in more than these levels or the employer could choose to pay the employee's contribution as well as its own, as long as at least 8% is being paid in by October 2018."
TWO: MOVING EMPLOYERS
Another important feature of the new regime is pension portability. Although employees will be auto-enrolled in a new scheme if they change employers, they will be able to transfer their old scheme if they want to.
The government is consulting on rules to make this as simple as possible so people will be encouraged to have one pension pot rather than a series of small ones. Mike Connolly, a spokesperson for Legal & General, says this is a good idea. "A ‘pot follows member' system will make it much easier to see what you've saved for your retirement, which may encourage you to save more," he explains.
THREE: AUTO-ENROLMENT TIMELINE
Companies are being phased into auto-enrolment, depending on the number of people they employ. Only the very largest companies with more than 120,000 people on their payroll (see table for roll-out dates) introduced auto-enrolment on 1 October 2012. The smallest companies will not join the scheme until 2017.
Not all employees will be eligible for autoenrolment. You'll need to be aged between 22 and state pension age, and earn more than £8,105 a year.
If you don't meet these criteria, can still join the scheme but you won't be automatically enrolled.
FOUR: PENSION ARRANGEMENTS
While the auto-enrolment process and minimum contributions are new, there are few changes to pension products. Schemes will need to meet certain criteria, such as meeting the minimum contribution rule and offering a suitable default investment fund, but many employers will be able to tweak an existing scheme.
Because of this, if you are a member of an existing pension scheme, other than receiving a letter or email from your employer regarding auto-enrolment, you probably won't notice any changes.
However, there are a couple of new players, such as Now: Pensions, a Danish pension company, and The People's Pension, run by workplace pension provider B&CE. The schemes of both are designed to be simple. Now: Pensions offers one investment choice, a diversified growth fund, while The People's Pension offers a choice of three investment profiles: cautious, balanced and adventurous. Charges are transparent.
Now: Pensions charges 0.3% on its investment and an administration charge of between 30p and £1.50 a month, while The People's Pension charges 0.5% a year.
FIVE: OPTING OUT
Whether your employer auto-enrols you into a scheme run by an insurer, one of the new players or NEST, you can choose to opt out. Pension experts caution against doing this though. Morten Nilsson, chief executive at Now: Pensions, says: "This is free money from your employer: it makes sense to take it."
However, there are some situations where it might not be wise to stay in your employer's scheme. For example, anyone close to the lifetime allowance of £1.5 million may choose to opt out to avoid pumping any more money into their pension.
If you do decide to opt out, the auto-enrolment regime won't leave it at that. Every three years your employer will auto-enrol you back into the scheme and, if you change employers, you'll go through the same process again.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.