Auto-enrolment is the not-so-new kid on the workplace pension block. The government initiative was launched back in 2012 to plug the gaping hole left from the falling number of final salary schemes on offer. And it has meant an additional 9.5 million people1 are now saving for their future. When ordinarily they may not have started until it was too late, if at all.
Yet, despite offering auto enrolment schemes being compulsory for employers since 2017, over a quarter of Brits1 admit to not being fully aware of their workplace pension scheme. This means thousands of people could be missing out on their hard-earned cash when they come to retire.
So, we’ve put together five all important things you need to know about auto-enrolment to make sure you get the most out of your workplace pension and maximise your retirement pot.
1. You need to meet these 3 criteria to be automatically enrolled
Are you aged 22 or over?
Do you earn a minimum of £10,000 a year?
Are you employed?
If you answered yes to all three of these questions, congratulations! You should be enrolled in your employer’s workplace pension scheme.
Paying into your scheme is easy. Everything is set up by your employer and your contributions are taken directly from your pay, meaning there’s no extra money for you to find.
5%: the percentage of your salary you contribute to your pension
You contribute 5% (including tax relief) of either your qualifying earnings or full salary to your pension. Depending how your employer has set up the scheme will affect how much your pay in. If you are not sure whether you pay pension contributions on qualifying earnings or on full earnings, talk to your employer.
2. You get free money from your employer
For every contribution that you make to your workplace pension, your employer is required to pay in a minimum of 3% of your earnings too. In fact, some employers go beyond this and match their employees’ contributions.
This free money from your employer significantly boosts the size of your retirement pot. Without this top up from your employer, your pension pot could miss out on a whopping…
If, like 50% of the nation, you are unsure how much your employer is paying into your pension4, you can speak to your HR department or check your contract to find out.
3. You can top up your pot
The beauty of auto-enrolment is that you pay into a pension without lifting a finger. Yet did you know you can boost your retirement savings by topping up your regular monthly contributions?
Paying in around £50 extra a month could see your pot grow by an extra…
To find out how you can make extra payments into your workplace scheme, speak to your HR department.
4. You could move your pot
For every new job you start you’ll be automatically enrolled into a new workplace pension scheme, providing you match the qualifying criteria. The contributions into the scheme attached to your old job will stop.
As you move up the career ladder and from job to job, it remains your responsibility to keep on top of any old workplace pension pots you pay into along the way. Misplace these, and you could miss out on thousands of pounds of your hard-earned cash when you retire.
Worryingly one in ten workers (11%) said they have no idea if they have an old pension from a previous job4. And 75% said if they did have an old pot, they’d have no idea how much it could be worth today.
One way to keep on top of old pots is to move them into one scheme. While this can make it easier to keep on top of the paperwork, this shouldn’t be the sole reason for combing your old pensions. There are some key questions to ask.
Will combing your pensions potentially improve the overall performance of your retirement savings? Will you be reducing running costs, which ultimately means more money in your pot with the chance to grow. And could you be giving up valuable guarantees by transferring your savings out of a current scheme? These are not easy questions to answer.
That’s why it makes sense to ask a regulated independent financial adviser, like Pension Egg, to check your pensions before you make any final decisions. If we can find a better pension for our clients, we take care of everything for them.
5. You can opt out (but you probably shouldn’t)
While it’s compulsory for your employer to opt you into their workplace pension scheme, you could choose to opt out.
If you were to opt out, and you didn’t make any other provisions for your retirement, your only income would be the State Pension, which is currently £179.58 a week (21/22 tax year). And you’ll only receive the full amount if you have made enough National Insurance contributions over the years. That would mean the equivalent of earning just over £9,000 a year. Would that be enough for you to live on?
Be pension smart
The moral of this auto-enrolment story is…
Keeping on top of all your pension should mean you have more money for your retirement plans. It’s about being pension smart; making sure you are taking advantage of all the opportunities available to you and making sure your money is working as hard as it can for you.
And if that sounds like a headache, you could always ditch the DIY approach and ask a pension expert to take care of your old workplace schemes for you.
2Survey of 2000 employed UK adults carried out between 08/01/19-16/01/19 TLF Panel
3To get to this figure, we assumed a 30 year old worker earned the UK median salary for full time work (ONS 2020: £31,461) and paid into the same scheme over a 35 year period. A 0.5% annual charge was applied. 5% annal return was applied. No initial charge was applied. This figure shows the difference the pot size would be with and without the employer’s contribution of 3%. Employee contribution 5% in both instances on full salary.
4Survey of 2,000 employed UK residents aged 25 or over, carried out in September 2019 by TLF Panel
5To get to this figure, we assumed a 30 year old worker earned the UK median salary for full time work (ONS 2020: £31,461) and paid into the same scheme over a 35 year period. A 0.5% annual charge was applied. 5% annual return was applied. No initial charge was applied. This figure shows the difference the pot size would be if the employee was to increase their contribution to 7% of their full salary. Employer contribution 3% in both instances.