What does auto-enrolment mean to you?

In late 2023, the government announced changes to the auto-enrolment rules for workplace pensions and these have recently passed into law. But many people still don’t understand their importance in preparing for a rewarding retirement.

What is auto-enrolment and when did it start?

In the past many companies offered employees the opportunity to save into a pension fund to help them prepare for their retirements, but many did not. To allow and encourage more people to save, the government introduced automatic enrolment (“auto-enrolment”) legislation in October 2012 that forced all employers to provide a pension scheme to their workforce. Employees were automatically enrolled if:

• They weren’t already part of a qualifying workplace pension;
• They were aged at least 22 but below the State Pension age;
• They earned more than £10,000 (in the current tax year);
• They worked in the UK.

Anyone earning between £6,240 and £10,000 could ask to join the scheme (and the company would have to let you) but you would not be signed up automatically. Anyone earning less than £6,240 could not join the scheme.

There were exemptions for businesses with less than 10 employees and for those whose only employees were directors of the company.

What are the pension auto-enrolment rules?

The minimum enrolment age has been reduced to 18, and the lower salary limit of £6,240 has been removed.

The past rules meant that many people were excluded from having the opportunity to save towards their future wellbeing. This was especially true if you worked part time and/or were on a low salary. The reasoning was sound enough: saving for the future could affect your current lifestyle if you were a low earner. But this generally impacted women more than men and raised fears that women were being indirectly discriminated against.

What do the auto-enrolment rules mean to me?

If you are already part of a pension scheme, you won’t notice any difference. But if you are not currently covered by the regulations you will notice a 3% reduction in your monthly pay which goes towards your auto enrolment contributions. While its only three pence in every pound, this might make it difficult to manage your household budget until you get used to it.

Can I opt out of auto enrolment?

You can ask to opt out of the company’s scheme, but if you do this you will miss out on the company contributing a further 5% to your pension savings account and this might not be in your best long-term interests. You can ask to opt out at any time and rejoin later when you feel more comfortable with the payments. Your employer will be required to re-enrol you every three years anyway, so you can reconsider your decision then.

The changes to the automatic enrolment rules mean everyone now has the chance to build a better retirement and that is something to be welcomed.

Why is it a good idea to save into a pension scheme?

We are all having to prepare better for our retirements. Each year the Pensions and Lifetime Savings Association releases a report on the cost of living for those in retirement. In its most recent survey, it highlighted that a basic retirement would cost someone £14,400. If you’re living together as a couple this is £19,900. Meanwhile the full New State Pension will provide an income of £11,502 this tax year.

So a state pension will barely cover your living costs if you live alone and provide a couple with some change for special treats. And the more you want from retirement, the more it will cost.

This is why it is important that we all think carefully about how we want to spend our retirement and how we will fund this lifestyle.

The state retirement age is 67 (rising to 68 by 2028). The average lifespan in 2024 for a 67-year old man is 85 and for a woman it is 88. If we take 20 years as a rough guide to the length of time the average person will spend in retirement, and the difference between what we need to spend and the New State Pension, we can calculate the minimum we need to have saved up. These figures are only a guide based on the situation today and don’t consider increases in the prices of goods and services (inflation).

Source: Charles Stanley

Retirement investing tips

There are several principles that apply when investing for the future:

• Starting as early as possible gives you as much time to reach your goals as possible. Lowering the starting age from which pension savings are offered is a great example of this. If you are aged 18 today you may be investing for 50 years or more, and you’ll benefit from many years of potential growth. And the power of compounding can mean that every year you earn returns on the previous years’ growth.
• Investing a small amount regularly can help you smooth out the ups and downs of investing. You might buy shares when they are expensive, and you might buy shares when they are good value. But by buying investments at a variety of prices over the year you can be sure your total portfolio was bought at the “average” price.
• Investing tax efficiently means you get to keep more of the returns. Pension accounts are the most tax efficient way of investing. All the while your investments are held in the portfolio any returns are free from capital gains and income tax. There is also a great degree of freedom when it comes to withdrawing from your pension savings, including the option to take 25% of the total pot tax free. Including 25% of all that potential growth. Follow the link for more on how pension tax relief works.
• Making the most of your tax allowances to save as much as you can afford. If you’re joining a pension scheme or already part of one and think you can afford to put away a little more each month, speak to your employer about making extra contributions. Some companies will match them to a maximum amount which is a welcome boost.
• Making sure your investment portfolio maximises returns for your level of risk. When you join the scheme, you might be offered a range of funds to choose from. Think about how long you’re likely to be invested and how happy you are taking risks. Generally, the longer you stay invested, the more risk you can afford to take. Although that isn’t the same as being happy taking that risk.

Auto-enrolment could make a huge difference to the type of retirement you might be able to enjoy. Most employers offer funds with lower fees and charges than you could find if you wanted to invest in a personal account. Over time, this difference in fees can make a difference to your total returns.

If you’d like to put away more for your retirement, consider opening a self-invested pension plan (SIPP). It’s a personal savings account where your investments can grow tax free, but you’ll have a wider range of investments to choose from. You can invest up to 100% of your earned income or £60,000 (whichever is the lower) each year and you can claim income tax relief on your contributions.

Would you like to speak to someone about retirement income, or are you looking for wealth management support? Request a call back from one of our financial professionals who can help you find the service to suit your needs.

The retirement benefits you receive from your pension plan depend on a number of factors including the value of your plan when you decide to take your benefits which aren't guaranteed and can go down as well as up. The benefits of your plan could fall below the amount(s) paid in.