Over six million workers are deciding to save for retirement through the Government-backed auto-enrolment scheme. Proving especially popular with lower paid workers, a growing number of employees are being automatically enrolled into workplace pension schemes. In this blog, Acumen discusses the impact of the workplace pension scheme on the workforce’s fortunes.
The auto-enrolment scheme, introduced in October 2012, made it compulsory for all employers to offer their staff a pension plan. Prior to this Government backed scheme, many employees missed out on the option of saving for a pension, especially those on lower wages. By introducing a scheme that automatically enrols all UK staff members, providing they are over the age of 22 and earning more than £10,000, makes it easier to start saving earlier, with very little effort needed from employees.
Companies are now legally obliged to enrol their employees, who then have to actively opt out if they don’t want to be a member of the pension scheme. So far, the scheme has proven popular among employees, with nine out of ten staff members choosing to stick with the pension procedure.
Who is eligible?
Presently, it is compulsory for all large employers to enrol their staff into a pension scheme and the amount of businesses involved is set to increase. Thousands of smaller employers, including nurseries, hairdressers and farmers are due to start introducing a pension plan, regardless of how many employees they have. While this will benefit staff members in small businesses, it could result in a multitude of issues as small employers are forced to absorb the extra overheads.
Currently, employees are required to contribute 0.8% of their salary, which is set to rise to 2.4% in April 2018 and then a further 4% in 2019. This illustrates a significant increase in employee contributions compared to when the scheme was first introduced. It has been speculated that as the contribution levels rise, some employees will choose to opt out.
However, it is worth remembering that if you opt out you are effectively turning down free money. Your employer is required to contribute to your pot, paying 1% of your earnings until April 2018, followed by 2% with a final rise to 3% in 2019. Therefore, while employee contributions are rising, so are employer contributions.
Workplace pensions are still considered the most cost-effective way of protecting your retirement fund. The auto-enrolment scheme makes it easy to save for retirement. However, it has been advised that employees actually need to save double their saving efforts in order to provide a decent retirement income. For example, at the moment someone earning £20,000 per annum will actually only save £400 over the year, which illustrates the clear need for further saving.
Start saving early
In order to make the most of your retirement fund, other methods of saving should be adopted alongside the workplace pension, such as the tax free ISA. If you increase the amount you save and start early, you will pay smaller amounts over the years compared to those who decide to save later. Employees who decide to start saving later in life will have to work harder and save more if they wish to retire at a reasonable age. In order to build enough of a pot to retire, they will be forced to contribute more.
To discuss your pension plan with one of our knowledgeable team please call us today on 0151 520 4353 or email firstname.lastname@example.org. For more information on retirement options please visit www.acumenfinancial.co.uk.