It is fair to say that in recent years, the 'first world' countries have experienced severe financial challenges and many have tightened their economic belts. There seems to have been a world-wide 'fasting period', with many restrictions placed on the population to encourage stabilisation, economic growth and lower inflation. The British government is no exception. There is an expectation that the general public will undertake more responsibility to plan for their old age than it has ever done before. Private pensions are no longer the exclusive domain of the rich, as more and more people sign up to save for their retirement.
In October 2012 the government introduced new legislation that made it compulsory for employers to offer employees a workplace pension scheme. This new initiative has a rolling programme and is due for completion in 2018. The initial roll-out meant that employers must automatically enrol workers into a workplace pension scheme if they are aged between 22 and State Pension age, earn more than £10,000 a year and work in the UK. This is known as 'automatic enrolment'. Employees not currently opted into the scheme can request to sign up and employers cannot refuse a person who wishes to join the scheme, even if they are not within the 'eligibility' parameter set. Employees can take a simple test online to see if they should be enrolled in a pension scheme and when the deadline for their enrolment is. Read more here: UK Gov:workplace pension scheme enrolment
Workplace pensions (also known as 'occupational', 'works', 'company' or 'work-based' pensions) are quite simple to understand. There are caps on how much can be saved, but the government, employees and employers all contribute to the various authorised schemes. A percentage of an employees pay is directed to the pension pot monthly, with employers also contributing. Employees can realise up to 100% tax relief on the amount they pay in to the pension fund annually. Legally, a minimum percentage of 'qualifying earnings' must be paid into a workplace pension scheme by an employee. 'Qualifying earnings' are the amount earned before tax between £5,772 and £41,865 a year OR the entire salary or wages before tax. An employer chooses how to work out qualifying earnings.
When an employee retires, the fund is then used to pay out weekly/monthly to support living expenses. Alternatively, a person can elect to draw the whole of the money, dependent on circumstances. In these cases, 25% of the lump sum is free, but tax must be paid on the remainder. The money cannot normally be withdrawn before the age of 55, though there are a few exceptions.
There are two types of workplace pension schemes and employers chooses which one to use;
Defined contribution pension scheme (also known as 'money purchase' schemes) - Your money is invested by a pension provider and the amount you get when you retire depends on:
Defined benefit pension schemes (also known as 'final salary' or 'salary-related' pensions). These are not reliant on investments and the amount you'll receive when you retire depends on your salary and how length of service with your employer.
courtesy of Gov.UK
|The minimum you pay||The minimum your employer pays||The government pays|
|0.8% of your 'qualifying earnings' rising to 4% by 2018||1% of your 'qualifying earnings' rising to 3% by 2018||0.2% of your 'qualifying earnings' rising to 1% by 2018|