25th November 2011
If you work for a big employer then in under twelve months you will be brought into a new pension system known as auto-enrolment. If you work for a smaller employer, with 40 employees or under, then you are likely to see a year's delay which may mean the reform will not affect you for several years.
Here in a nutshell are the proposals. First if you are not in a pension from next year for large employers and over the next four or five years for all employers, you will have to be offered access to a pension.
The employer will have to contribute at least three per cent, you will be expected to contribute four and the government will contribute one, in terms of tax relief.
This makes a contribution equal to eight per cent of salary. If your employer already contributes to a pension, then this may qualify instead but once again all employees must be given the chance of joining.
However, there is another significant aspect. You can opt out of the pension, in which case neither you, nor your employer, nor the Government pays anything. But if you don't actively opt out, for most income groups and age groups you will be opted in.
The plan relies on inertia to get people to save for a pension in the belief that it is often inertia now which stops them.
However some employers' groups have been calling for a delay because of the economic situation. The Institute of Directors asked for a delay just a few weeks ago, as reported here on Business Daily.
It quotes Simon Walker, director general of the IoD, saying: " This is the wrong time to be implementing auto-enrolment, especially as The Bank of England's downward revision last week of their growth forecasts for this year and next shows that companies and households are hard-pressed. Real incomes are being squeezed and employers are struggling to offer staff pay rises."
And for some of his smaller members, he appears to have got his way. The Mail quotes a source saying: "A source familiar with the Government's plans said: ‘There's going to be a delay in the timetable to give firms more time to prepare. It will be part of the strategy for growth. The argument will be that we need to be as kind as possible to small businesses."
Employers generally divide into at least two groups. Some arguably better employers already offer access to pensions and view it as an employee benefit that helps them attract and retain better staff.
They could see costs rise as more staff join. But some big sectors of the economy – say for example catering and tourism – where often no pension is provided – will see a much bigger rise in costs.Hence their complaints.
But other experts believe it is not only the attitude of employers but employees that imperils the reform because of the risk of a huge number of opt outs.
Trade website Engaged Investor reported the views of an adviser to many hundreds of employers, Jelf Employee Benefits. Its survey found that 63 per cent of employers want a delay but its resident pensions expert Steve Herbert that many employees will not stomach the contributions.
Indeed, the government source quoted by the Daily Mail seems to be sympathetic to the view because it is much easier to take a percentage from people's take home pay and put it in a pension if wages are rising rather than stagnating.
So what should you do? Well, if there are contributions on offer from your employer most would say it is wise to take them. It can make a huge difference to the amount you will have in your pension. You may be offered a range of investments and it is worth considering carefully which investments fit your attitude to risk. You may have other pension and investment plans too, such as an existing pension and you need to consider what to do there as well.
However, many experts are warning that 8 per cent the ultimate amount you may be expected to contribute may not be enough if you want to have a comfortable retirement and it may be worth checking with an independent pension adviser.
If you are in a firm with less than 40 employees, which doesn't offer a decent pension, then you should remember every year delay can cost a considerable amount. The earlier you start the earlier the power of compound returns, can help you achieve a decent retirement income.But if you are with a small employer, the decision on when this starts may be out of your hands.
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