Pension changes: what they mean for you
If you are one of the many people worried about how you are going to fund your retirement, the answer could be closer than you think.
From October this year, the law on workplace pension provision is changing, and millions of workers will be automatically enrolled into a pension scheme that their employers will be required to offer.
The alternative approach is for employers to enroll staff into a new Government-backed low-cost scheme called NEST (National Employment Savings Trust).
On June 19 NEST launched a campaign called "Tomorrow is worth saving for." The aim is to use social media sites such as Twitter to raise consumer awareness of auto-enrolment and where NEST fits in, and to ignite interest in pension planning; for more details of the campaign, see below.
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With the introduction of auto-enrolment now less than six months away, we take a look at what the pension reforms will mean for you.
What is auto-enrolment?
Auto-enrolment is a government plan to give employees a workplace pension by making it compulsory for employers to sign staff up to a company scheme.
These schemes will need to meet - or exceed - certain government standards, and workers will be given tax breaks to encourage them not to drop out.
What is NEST?
NEST has been established to ensure there will be an easy-to-use, low-cost pension scheme available to all UK employers to help them meet their new duties under auto-enrolment.
It has been created specifically for people who haven't traditionally had access to pensions - and for the organisations that employ them - and is run on a not-for-profit basis.
The aim is to offer a jargon-free, more accessible approach to pension saving.
Who will qualify?
Employers will need to automatically enroll workers who are aged at least 22 and above, but who are under State pension age; they must earn more than £8,105 a year.
How much will contributions be?
The minimum overall contribution into a pension in your name will eventually have to be 8% of which employers will have to contribute a minimum of 3%; both employers and individuals can choose to contribute more.
Contribution levels will be phased in - starting at 2% of a worker's qualifying earnings. Of this amount, the employer must pay at least 1%.
What is the timeline?
For the largest employers, the new duties will apply from October 2012, followed by medium-sized employers over the next couple of years.
Small and micro-employers will be affected last through a process is known as staging; this stretches through to 2018.
Auto-enrolment will affect up to 10 million people across the UK, according to NEST.
Can I still opt out?
While the scheme is compulsory for employers, as a worker you still have the option of opting out at any time - although the new proposals are designed to discourage this.
At present, employees have to actively "opt in" to join by filling out paperwork.
Auto-enrolment will turn the current situation on its head and require people to fill in a form if they want to opt out.
Is auto-enrolment being welcomed?
Auto enrolment is being welcomed as it will boost pension provision in the UK - and particularly among the lower-paid.
This comes at a time when workplace pension schemes are in decline, with many smaller companies not offering them at all.
There are also hopes this could be the catalyst to change young people's savings habits - and get them thinking ahead to their retirement.
What are the critics saying?
Critics say this is too little too late, and many are concerned contribution levels are too low.
At present if you save the minimum in NEST, it likely to give you only a very small amount of cash - and particularly when spread over retirement which could span for a few decades.
There are fears people may not realise they will still need to save more on top of this.
There are also worries many workers will opt out either because they don't have the spare cash, have to repay debts - or simply can't be bothered.
Can I choose between NEST and a workplace scheme?
As an employee, you will not have any control over this, as it is down to your employer to make this decision.
For more information on the planned changes to go dwp.gov.uk/workplacepension and for information about NEST go to Nestpensions.org.uk. For more details about complying with the new rules visit thepensionsregulator.gov.uk.
What is the aim of the NEST awareness campaign?
The campaign is aimed at starting a conversation with consumers about what makes "Tomorrow worth saving for" - as well as highlighting the benefits of auto-enrolment.
This is launched on the back of research showing millions of people are not saving for their later lives through low confidence and fear of mistakes.
Findings from NEST show 71% of people say they don't want to make the wrong decision, while nearly half say they don't know enough about what would be their best option.
What will the campaign entail?
The campaign will use social media to ask people to ask people to come up with ideas for advertisements that link the lifestyle they have now with the one they'd like when they retire. This might include activities such as socialising with friends, going to the cinema and going shopping.
The hope is that by showing people that if they put money aside now, they will still be able to enjoy good things later on, they may be more convinced to start saving into a pension.
NEST has already developed some ideas for potential adverts to spread the message about auto-enrolment and the role of NEST, and wants consumers to comment on these and give their own ideas; the winning ideas will then be developed into adverts.
For more information visit faceboook.com/nestpensions, follow the campaign on Twitter via @nestpensions or the hashtag #worthsavingfor, and also check out the NEST Pinterest profile at pinterest.com/nestpensions.
TOP PENSION TIPS
- Remember that pensions remain one of the most tax-efficient ways of putting money aside for retirement.
- Remember that failure to maximise pension contributions is akin to throwing away free money.
- When it comes to pension saving, the earlier you begin the better. Starting at a young age will give you the best chance of building up a decent nest egg to see you through retirement.
- Don't wait for auto-enrolment to start before turning your attention to saving for old age - as it will be several years before all employers are fully signed up.
- Don't assume the levels stipulated by auto-enrolment will be enough to guarantee a comfortable retirement. If you can, try saving more beyond this.
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