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Automatic enrolment is upon us…
Automatic enrolment – what is it?
The government has introduced a new law to make it easier for people to save for their retirement. It requires all employers to enrol their workers into a qualifying workplace scheme if they are not already in one. At present, many workers fail to take up valuable pension benefits because they do not make an application to join their employer’s scheme. Automatic enrolment is meant to overcome this.
What is a qualifying workplace scheme?
A qualifying scheme can be:
A defined contribution scheme with a minimum contribution; or
A defined benefit or hybrid scheme which meets certain conditions.
Does this affect me?
Employers have to automatically enrol workers who:
Are not already in a qualifying workplace pension scheme;
Are at least 22 years old;
Are below state pension age;
Earn more than £8,105 a year; and
Work or ordinarily work in the UK (under their contract)
However, even if you do not qualify to be automatically enrolled, you still have the right to join the scheme. If you tell your employer that you would like to opt in to the scheme, they must allow you to do so.
When is this happening?
Although automatic enrolment comes in from 1 October 2012, individual employers’ duties will be introduced gradually over the following five years, and will be based on the employer’s size.
Please do just call us to check when it will impact on yourself.
There will be a maximum three month waiting period before your employer must enrol you; however, if you are aged between 16 and 75 years and want to start saving straight away, you will be able to opt into the scheme.
What does this mean for me?
If you join a money purchase (defined contribution) scheme, you will have your own pension pot which you open when you retire. Contributions from you and your employer will be paid into your pot. You can keep the same pot even if you move jobs.
What if I am in a final salary (defined benefit) scheme?
If the scheme meets the minimum quality standards, then you will be able to continue to build up benefits in the scheme as usual. If the scheme falls short of the standard, then your employer may either have to make amendments to the scheme to improve the benefits or set up an alternative scheme. Your employer may have to consult the workers before making any changes.
What if I don’t want to be in a pension scheme?
You can choose to opt out of your scheme at any time if you want to. If you opt out within a certain period (your employer will let you know of the deadline), any payments already made will be refunded, as if you had never joined. If you opt out after this, the payments already made will not be refunded and will remain in your pensions pot.
Rejoining the scheme
If you have opted out, you can rejoin at a later date if you wish.
Your employer will also have a duty to automatically enrol you back into the scheme every three years, if you fall into the categories given above. This is to give you the opportunity to reconsider your decision.
How much will be paid into my pension pot?
If you are a member of a defined benefit scheme, your scheme will have to ensure that it meets minimum requirements.
The minimum requirements for a defined benefit pension scheme are either:
It has a valid contracting-out certificate, indicating that it is an appropriate replacement for the state second pension; or
It provides broadly equivalent or better benefits than the benefits which a contracted-out scheme is required to provide.
If you are in a defined contribution scheme, the amount of money paid in by you, your employer and by the government from tax relief is worked out as a percentage of your earnings. ‘Tax relief’ means that some of the money that would have gone to the government in the form of tax now goes to your pension pot instead.
The government has set a minimum percentage that has to be contributed in total. This means your contribution, your employer’s contribution and the tax relief added together. This minimum increases gradually between 2012 and October 2018.
The proposed duration periods are set out below and will be updated once the DWP has finished its consultation.
Timing Minimum Total Percentage that has to go into your pot
October 2012 to September 2017 2%
October 2017 to September 2018 5%
October 2018 onwards 8%
Contributions to the pension scheme can exceed this minimum.
Within that total contribution, the government has also set a minimum percentage that has to be contributed by the employer. This will also increase gradually over time.
Timing Minimum that has to be contributed by the employer
October 2012 to September 2017 1%
October 2017 to September 2018 2%
October 2018 onwards 3%
Employers will be able to contribute more than the minimum if they wish; many already do.
These minimum percentages do not apply to all of your salary, but on what you earn over a minimum (currently £5,564) up to a maximum limit (currently £42,475).
Can my employer base contributions on a different definition?
If using a defined contribution scheme, your employer bases contributions on earnings from the first pound. If using this basis, it must also be able to meet the conditions laid down in one of the tiers of the new test. The tiers are as follows:
Tier 1 – a contribution of at least 9 per cent of pensionable earnings of which 4 per cent must come from your employer;
Tier 2 – a contribution of at least 8 per cent of pensionable earnings of which 3 per cent must come from your employer. There is also a condition relating to the percentage of earnings which must be covered; or
Tier 3 – a contribution of at least 7 per cent of earnings of which at least 3 per cent must come from your employer.
NB If your employer chooses to use either of the tier 1 or tier 2 tests they need to use a definition of pensionable pay that is at least equal to basic pay.
Contribution rates for schemes using the tiered system will also be phased in. These are at the proposal stage and will be updated when the consultation is complete.
As ever, if you need to know more, please contact your usual McLintocks partner
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