Changes to Auto Enrolment: Sifting through the detail for the real benefits

For the millions of people already automatically enrolled into a workplace pension, the amount you must pay in is going up in April. You may have seen the many stories in the media about this (which to us have been portrayed negatively) however, what your employer has to contribute is increasing too – meaning a hidden pay rise for many, although you will also be paying out more yourself.

Signing up to the pension auto-enrolment scheme is automatic (hence the name), but you can opt out if you choose.

The Basics:

Put simply, Auto Enrolment is a great opportunity to boost your pension savings through your pay packet – with the added bonus of your employer and the Government also making contributions.

You won’t be able to access this pension pot until you are at least 55 years old. Until then, a pension provider will hold it for you.

Auto-enrolment was a radical new development brought in by the Government back in 2012 and was the first big UK test of the ‘push economics theory’ – which in a nutshell means you set up the system so people default to the correct action – in other words, the lazy or apathetic option is to contribute. You have to  make an active decision in order to not take part.

Overall, we’re big fans. We need to help people to help themselves, and inevitably most of us are guilty of decision-making focused on the now, not the future. Nowhere is that more important than when it comes to pensions. So, any help to change behaviour is useful.

Who does auto enrolment apply to?

Currently, enrolment is automatic for people aged between 22 and state pension age, earning a minimum of £10,000 (from a single job) and work in the UK.

Don’t worry, if you don’t meet this criteria, you may still able to make pension contributions, but the minimum requirements as set out below will not apply.  Please see below for further information.

What do I pay?

First of all, it depends on how much you earn, as you pay a percentage of your wage – so the more you earn, the more you pay in. What is the contribution level?

The contributions have been gradually increasing since 2012, with the latest increase taking place on 6th April. There are no plans at this time to apply any further increases in the future.

  • The minimum total auto-enrolment contribution is to rise to 8% of which the employer must contribute at least 3% of ‘qualifying earnings’.

Some employers elect to pay more than the minimum employer contribution, which in turn reduces the amount employees are required to pay.

What are qualifying earnings?

From 06th April, this is pre-tax employment income between the Government’s ‘lower earnings limit’ – £6,136 and  £50,000 which is the UK higher rate tax threshold.

Pension Scheme Contributions:

It should be noted these are the minimum contribution requirements for auto-enrolment schemes.

Some employers may elect to apply different contribution criteria for their pension schemes which exceed these minimums.  Variances could include contributions being paid as a percentage of total earnings rather than only qualifying earnings.

Employers cannot however set the contribution rate so high that it acts as a deterrent for employees to contribute, if this happens they may get investigated by The Pensions Regulator.

Changes to offset the cost of employee contributions:

Whilst the cost of employee contributions may appear high, these are likely to be offset by increases to the Personal Allowance and higher rate tax threshold which are also effective from 06th April.

These changes can mean an extra £155 a year in your pocket if you earn between £12,500 and £50,000, and £566 more if you earn between £50,000 and £100,000.

The Benefit of Tax Relief:

To encourage you to contribute more into your pension, the Government gives tax relief on what you put in – up to a certain limit.

This tax relief is received in different ways:

  • If your pension contributions are coming out of your salary before tax, they won’t be counted as part of your taxable salary, so you won’t pay any tax on them. You get tax relief at the highest rate of tax you pay.
  • If your pension contributions are paid out of your salary after tax, the pension provider automatically adds basic rate tax relief when you make a contribution. If you pay higher or additional rate income tax, you can reclaim further tax relief through your annual self-assessment tax return.

This means a £100 pension contribution will effectively cost £80 if you pay basic-rate income tax, £60 if you pay higher-rate tax and £55 if you pay the top rate of income tax. If you’re a non-taxpayer you can still get basic-rate tax relief on contributions up to £2,880 (£3,600 including tax relief).

Your employer might offer a salary sacrifice arrangement (sometimes called salary exchange). If this is the case, you agree to give up part of your salary and your employer agrees to pay this amount into your pension as an employer contribution.

Salary sacrifice can also reduce your National Insurance payments, boosting your take home pay. Your employer may also choose to pass on their National Insurance savings as an additional contribution to your pension plan.

Salary sacrifice can have its pitfalls and may affect your eligibility for some State benefits and your ability to obtain credit.

What happens if I’m not eligible for auto-enrolment?

Some exclusions such as if you’re self-employed or you’re a sole director company with no other staff, in these scenarios, you may be able to set up and contribute to your own pension arrangement, without the minimum requirements as set out above.

If you are not eligible for auto-enrolment, you may still be able to join the pension scheme.

  • If you are aged between 16 and 75 and earn more than the Government’s ‘lower earning limit’ (£6136) you can opt in and be treated as though you had been auto-enrolled into the pension.
  • If you earn less than the ‘lower earnings limit’ you can still join the pension, but your employer does not have to make any contributions to it.

Future Changes:

The minimum requirements as set out above are based on current legislation and may be subject to change in the future.

We are aware the Government is exploring whether to remove the lower earnings limit, as well as possibly extending auto-enrolment to 18 to 21-year-olds to get younger people to start saving for their pensions.

We will keep you informed of any further changes and how these may affect you.

Our conclusions:

Since inception, Auto Enrolment has proven to be a successful method for focussing employee’s attention on saving for retirement. This can only be a good thing!

When the auto-enrolment started, the Department for Work and Pensions (DWP) projected that opt-out rates could be as high as 28%, but the most recent official data – recorded before the April contribution increases – showed overall opt-outs are running at about 9%. Again, this can only be a positive.

So yes, any potential reduction in take home pay is never a welcome thought, but the ‘free money’ that you will be receiving from your employer and through tax relief should outweigh these negatives.  Anything that supports saving for retirement should be embraced, as the alternative option of no retirement income does not bear thinking about. We cannot simply rely on there being a State Pension like the generations before.

If you have any questions, please speak to your adviser on 01642 765957

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