Pension auto-enrolment: make the most of your choicesPosted on: 22 October 2012 by Andrew Stallard
Andrew Stallard questions the merits of the new auto-enrolment pension scheme.
The politicians are meddling with pensions again! Cynics may say that the pensions crisis could be solved by rolling an existing perfect pension scheme out to the nation - the one currently enjoyed by those lucky members of the House of Commons. However, this would in all probability bankrupt the country so most of us have to make do with schemes that result in us paying big charges and being exposed to stock market volatility.
From the 1st of October 2012 a new law has come into effect that aims to make it easier for people to save for their retirement. It also aims to place more responsibility for saving on both employers and individuals. Auto-enrolment requires all employers to enrol their workers into a qualifying workplace scheme and, crucially, to contribute to that scheme.
Over the next few years this will affect all businesses, even if they only have one employee. There's no choice about that - failure to comply will result in large penalties and possible imprisonment. To help employers to fulfil their new duties, the government has set up a new scheme called NEST (National Employment Savings Trust). But many employers are choosing to make their own arrangements rather than have another government agency forced upon them.
If you're an employee, you have the choice to opt out of the scheme, but the onus is on you to take that action. By default, you will be enrolled in your employer's scheme if you are eligible - if you are between 22 and the state pension age and your salary is above the tax threshold of £8,105.
Our view is that for most people, choosing to opt out would be unwise. Although joining will require you to contribute a percentage of your wages to your pension, you will receive tax relief and your employer will also be required to contribute. If you opt out, in effect, you are turning down part of your pay!
Auto enrolment calculation example
|You employer puts in||£30|
|You put in||£40|
|The governement puts in||£10|
Why is the government bringing in this change? Because life expectancy continues to increase and few observers expect the state pension to become more generous. Without vastly increased non state-funded pension provision, millions of people face a bleak financial position in retirement - a period of life that could last many decades.
How can your independent financial adviser help?
If you are an employer, your adviser will research and select a scheme that fits in with your business, fulfils this new obligation and provides a positive benefit to your employees.
We would recommend you choose a fee-based service rather than commission as you can ensure pension provider charges are as low as possible and every penny paid into the pension scheme is credited to the employees’ pension funds, not lost in commission payments. Small savings in charges at the start can result in employees enjoying many thousands of pounds extra in retirement.
Choosing a fee-based approach can also mean that employees gain the extra bonus of access to independent financial advice about other products, not just pensions.
Finally, as an employer, if you are reviewing your payroll calculations, why not take the opportunity to review what other benefits you could offer to your employees, such as health cash plans, some of which can be provided at no cost to you. Take a long-term holistic view of what you offer to employees, and it's likely to pay off in the future.
How about looking at it this way: the choice is yours to either see auto-enrolment as another imposition on employers, or see it as your chance to set up a high quality scheme which also benefits you as it helps with staff retention and recruitment.
Finally, whether you are an employer or an employee, a good pension could give you the chance to make even more exciting choices when you retire.
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