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The Pensions Act 2011 makes pension automatic enrolment mandatory within the UK under certain criteria. The legislation means that employers have to offer you a workplace pension which both you and the employer pay into currently up to 8% of your annual salary. Your contributions are automatically deducted from your salary, and in addition, your employer and the government also make contributions. Your employer must contribute a minimum of 3% of your annual salary up to a certain threshold (many employers chose to contribute a higher amount) and the government contributes a minimum of 1% through tax relief. The legislation allows you to opt-out meaning all members have the option to cease making pensionable contributions.
Why was auto-enrolment introduced?
Auto-enrolment was brought into law in 2011 to stimulate pensionable savings within the UK. Before auto-enrolment many employers already contribute to employees’ pension pot the legislation simply made it mandatory. The governmental consensus was that too many people within an ageing population were heading towards retirement with insufficient savings.
Do I have to stay enrolled?
No. The auto-enrolment system is opt-out, as such if you do not wish to stay enrolled for whatever reason, you can opt-out. Opting-out should not be a decision taken lightly as you are effectively turning down ‘free money’ going into your pension pot from your employer and the government.
I work for a small company, does this still apply to me?
Yes. Auto-enrolment was slowly introduced in 2012 firstly with the largest companies, followed by medium-sized companies and finally smaller companies.
How do I qualify for auto-enrolment?
Your employer has a legal obligation to enrol you into a scheme if you work in the UK, you are 22 years or older but below the state pension age. Finally, you must earn more than £10,000 (pre-tax) in the 2019/20 tax year. This applies to part-time, agency or short-term contract employees.
I earn under £10,000 per year but would like to contribute, can I?
If you earn an annual income between £6,136 and £9,999 your employer is not under legal obligation to enrol you in the scheme. However, if you want to start saving you can request to join the scheme (opt-in), in which case your employer has to accept you onto the scheme and make contributions on your behalf, alongside your contributions.
Will my state and workplace pension be enough?
Do not assume that your auto-enrolment pension contributions will provide you with the lifestyle in retirement you are imagining. You must work out exactly how much you are saving and if this is on target to meet the amount you believe you will need in retirement. Your retirement portfolio requires diversification and attention, it is often good to speak with a financial advisor to ensure your on course to meet your retirement objectives.
The basic calculation
The current full state pension is just over £8,750 per annum.
Royal London’s 2018 report titled ‘Will we ever summit the Pension Mountain?’, claimed that you would need a pension pot of £260,000 if you want to avoid an uncomfortable retirement. This sum would provide a pension income of just over £9,000 a year in addition to the new state pension of around £8,750 a year.
Everyone’s retirement objectives are vastly different – whilst Royal London’s research shows how to avoid an uncomfortable retirement, we understand many people wish to a more luxurious retirement, so to learn more about retirement planning click on the link below.
Don't hesitate to learn all about our recipe for success in easy steps!