Occupational Pensions - Auto Enrolment
Are you ready for 2012?
Increasing life expectancy and declining pension participation mean millions face inadequate retirement income
What's happening to workplace pensions in 2012?
Workplace pension reforms mean that starting from 2012 employers will have to put eligible workers into a scheme that meets certain criteria. They will also have to make minimum contributions to the scheme. This is called auto-enrolment. Government estimates suggest that more than seven million people are not saving enough to achieve a reasonable income in retirement.
The ageing baby boom generation, increasing life expectancy, declining workplace pension participation mean that millions of people are facing an inadequate income in retirement. Falling birth rates also mean that in the future there will be less working people to support the non-working population through their taxes.
To address this the Government is implementing an integrated package of reforms to help improve retirement outcomes for millions of people. These reforms include changes to State Pension provision and significant changes to workplace pensions. From 2012 the Government is placing a duty on employers to automatically enrol all eligible workers, as defined by the Pensions Act 2008, into a pension scheme that meets certain criteria.
This automatic enrolment into occupational pension schemes will encourage people to make provision for their retirement and not be reliant only on whatever the state safety net can provide. Many people find making decisions about pensions difficult. Without encouragement, many people fail to make these important decisions and live to regret it.
Starting from 2012 employers will also be required to make a minimum contribution to their workers' retirement pots, meaning workers can eventually expect a total minimum pension contribution of 8 per cent on qualifying earnings. This will be made up of a minimum 3 per cent employer contribution added to tax relief and the worker's own contribution. Both employers and workers can contribute more than the minimum if they wish.
Automatic enrolment and minimum contributions represent a significant change aimed at giving millions more people access to a quality workplace pension and making workplace pension saving the norm in the UK, as it is in many other countries.
Currently around 750,000 employers in the UK's private sector offer no pension to their workers. While a further 280,000 offer some provision, these employers' contributions to their workers' pensions are less than 3 per cent.
More than half of workers earning between £5,000 and £25,000 do not contribute to a pension at all.
Auto-enrolment is being designed to overcome the inertia that currently prevents many people from saving and to make it easy for individuals to save in pensions. Employers will have to contribute a minimum of 3 per cent on a band of earnings, although they can contribute more than this. The total minimum contribution for eligible workers must be 8 per cent of the band of earnings. This is made up of employer contributions, tax relief and the worker's contribution. - Contributions will be phased in for employers and employees, starting at 1 per cent and increasing gradually to the minimum level to help employers and workers adjust to costs.
As with any major change, it is best to plan ahead so as an employer you are not caught out by the deadline. TWP can provide you help and support in preparing your business for this and establish a scheme that is compliant with the new rules.
If you would like to explore this further you can speak to a retirement expert on the above number or by email PENSIONSadvice@TWPwealthmanagement.co.uk