Wednesday, 3 October 2012

The biggest change in work place pensions for over 100 years

The biggest change in pensions since the last full Liberal Government over 100 years ago took effect this week with the introduction of the new workplace pension scheme. The workplace pension is designed to supplement the current state pension to try and give millions of low and middle-income earning employees the chance of a better retirement.

These changes will have a great impact on employers and employees over the next few years.

It has been introduced due to the decline in workers’ pension provision as a growing number of employers are not providing or offering anything to their employees and also to recognise that fact that the meager state pension is not enough on its own.

Official figures show that the number of private sector workers paying into a pension is at its lowest since records began in 1953 – in 2011 only 2.9 million private sector workers put money into schemes.

The new workplace pension is being viewed as a step forward to ensure that workers at least have a chance of a stable retirement, although some critics have warned that the new scheme has not gone far enough.

It will affect millions of UK employees. The National Association of Pension Funds (NAPF), said its research shows that only a quarter (24%) of workers earning £14,000 or less save into a workplace pension. The new reform will reach those who have no pension: the young, the low-paid and those working for small businesses.

TUC general secretary Brendan Barber said: "With this Government and the last helping ensure a wide consensus around the reform package, we have some certainty that we are now at the beginning of a pensions new deal. Of course it can and should be made better, but we now have what should be a stable framework."

A simple guide to the new system
The system is expected to work due to its simplicity. The company that you work for chooses a simple pension and they put money in and you put money in – although you do have the option to opt out.

The process started with the biggest employers on 1 October 2012 and will then be staggered over the next few years until 2018. The smallest employers begin auto-enrolment for their staff in January 2015. To see the full auto-enrolment timetable please click here.

Workers will either join their existing employer's scheme, or one of the new group schemes that employers can use e.g. National Employment Savings Trust (NEST).

  • Must be aged 22 to the state pension age
  • Workers not already in a company pension scheme will be enrolled
  • Workers must be earning at least £8,105 a year
  • The contribution they, and their employers, make will be based on their wage - the first £5,564 a year they earn will not be taken into account. Any earnings above £42,475 will also be ignored. Therefore, anything between £5,564 and £42,475 is known as their pensionable pay
  • Staff can opt out

Contributions gradually rise over time - this is to assist both workers and employees in the initial stages of the scheme. The starting figure for staff is a minimum of only 0.8% of their pensionable earnings and on top of that employers will have to pay in 1% of their employees' pensionable earnings, with tax relief contributing another 0.2%.

The levels will eventually rise to 4% from the employee, 3% from their employer and 1% in tax relief, giving a total of 8%.

The contributions will be invested and then when the employee retires, the earliest currently being 55. They will have to buy an annual pension, or annuity, with their accumulated pot.

Full details can be found here

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