Almost three-quarters of employees now contribute to a workplace pension with 73 per cent of UK employees enrolled in 2017 – up from fewer than 47 per cent in 2012.Much of this rise is down to the introduction of auto-enrolment. Since October 2012, more than 9.5 million people have been auto- enrolled through this process.
Auto-enrolment is a government initiative to help more people save for later life through a pension scheme at work. Employees no longer have to sign any forms to join their firm’s workplace pension scheme as this is done automatically by their employer for eligible workers. The employer must also pay money into the scheme.
Employees are eligible for auto-enrolment if they’re at least 22 years old, not yet of State Pension Age and earning at least £10,000 a year.
In the past, many workers missed out on valuable pension benefits because their employer didn’t offer them a pension, or they didn’t apply to join their company’s pension scheme. Auto-enrolment changes this.
Last month, the legal minimum overall contribution rate rose from 2 per cent to 5 per cent, of an employee's qualifying earnings, with the minimum contribution from the employer rising from 1 per cent to 2 per cent. Next April, the total contribution rate rises again to 8 per cent, at least 3 per cent of which must come from an employer.
In 2017, contributions by private sector employers to defined contribution pension schemes were abysmally low – almost half contributed less than their new minimum rate of 2 per cent of pensionable earnings.
Similarly, employee contributions were concentrated at low levels in 2017. Around 45 per cent of private sector employees with defined contribution pension schemes were contributing less than 1 per cent of pensionable earnings, and only around one in three employees was contributing 3 per cent or more.
Most pension experts recommend that you save at least 12 per cent of your salary to ensure that you retire on an adequate pension.
Nigel Peaple, deputy director for defined contribution, lifetime savings and research at the Pensions and Lifetime Savings Association, points out: ‘While the government’s phased increases will see minimum contributions rise to 8 per cent by 2019, there is a still a risk that this will not be enough to allow savers to live comfortably in retirement. We believe the minimum level needs to increase to 12 per cent of salary over the course of the 2020s if retirees are to be financially secure.’
Steve Webb, director of policy at Royal London, agrees: ‘A combined contribution rate of 8 per cent between worker and firm is simply not good enough for most people. The single most important thing that the government could do would be to ensure that when people get a pay rise they automatically increase their contribution rate unless they actively opt out. We know that this approach works in the US and it is time to do the same in the UK if we are to avoid a generation of workers who will simply be unable to afford to retire.’
So far, around nine in 10 employees have remained in their workplace pension after being enrolled.
Employees with an auto-enrolment pension can choose to stop saving at any time, although they’ll lose out on future private pension benefits including contributions from their employer, as well as associated tax relief from their own contributions and pension savers who opt out of the auto-enrolment could lose a quarter of million pounds in pension savings, according to figures from Fidelity International.
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