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New pension legislation – what does it mean for you?


The biggest shake up to the UK pensions system came into effect on Monday October 1st  when a phased enrolment scheme began to encourage workers to save for their retirement.

The ‘demographic time bomb’ has been ticking for some time and successive governments have sought ways to address the issues surrounding shortfalls in pension benefits. The population is living for longer and saving less towards the retirement years, which places an increased burden on the State benefits system.

Under the new scheme employees will be automatically enrolled onto their employer’s pension scheme. This new initiative will begin with the largest companies, i.e. those with 120,000 employees on their payroll scheme at April 1 2012.  Employers will be required to make minimum contributions into each employee’s pension fund or provide a minimum level of benefits.  The ‘big four’ supermarkets are expected to be among the first to enrol their employees.

Eventually all employees who meet the criteria will be phased into the scheme and the enrolment process will take several years.   The Department for Work and Pensions has estimated that 11 million people in the UK have no pension provision (across both public and private sectors) and this new legislation has been designed to encourage employees to make savings provision for their retirement years via a workplace pension scheme. 

For the millions of employees already in a workplace scheme nothing will change, but here are the key points for those who will eventually be eligible for a workplace pension.

·         Employers must enrol workers who are at least 22 years old but are below state pension age and earn more than a minimum amount (£7,475 a year under current proposals) and who are not already in a workplace scheme. Anyone who is on the national minimum wage and working more than 25 hours a week will be auto-enrolled.

·         Workers not in that group can opt in if they wish to.  Those aged at least 16 but below 75 and earn more than £5,564 a year may ask to be enrolled. The company must enrol these workers in the scheme and pay a minimum contribution.

·         Companies will also need to enrol any workers aged 16-74 who earn less the figure above and who ask to join the scheme; however the employer does not have to pay contributions for them.

·         Employees who are automatically enrolled and stay in the scheme will benefit from their employer’s contribution, plus their own and will also benefit from tax relief. There will be a phased contribution rate, expected to start at 2% of earnings (1% from the employer and 1% from the employee). By October 2018 this will have risen to 8% – at least 3% from the company, up to 4% from the employee and 1% tax relief.

The new legislation has taken years to plan and it’s expected that approximately 6.5 million workers will become enrolled in the early months of the scheme. 

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