If you work for a small business, which doesn’t already offer you a pension, it’s likely you will be automatically enrolled into a workplace pension over the next year or so.
Automatic Enrolment is designed to get more people saving for retirement and there are signs that it’s working. You and your employer will make contributions; you will also be entitled to tax-relief, further boosting the amount paid in each month.
Of course once you are enrolled you could choose to opt-out, an option already taken by employees of larger businesses. A survey by Scottish Widow has highlighted the main reasons people opt out:
- Lack of money (29%)
- Other financial commitments such as loans and credit cards (23%)
- Workers in their 20s and those with large families were most likely to opt-out
However, it is working for many, with the number of employees earning between £10,000 and £30,000 each year who are saving adequately for retirement now at 50%, an increase of 16% since 2012.
So, if you are automatically enrolled over the next year or so, here are six reasons why you shouldn’t opt-out and miss out.
#1: You’re probably not saving enough for retirement
Most people are not saving enough for retirement; Automatic Enrolment is therefore an ideal opportunity to start putting money to one side for retirement.
Contributions will be deducted automatically from your pay packet; you won’t even have to make a decision on how the money is invested (unless of course you want to).
It really couldn’t be made easier or more convenient.
#2: Opting-out means turning down ‘free’ money
Your employer will make contributions to your pension, as will the taxman; opting-out means you will lose these payments. To put it another way, you are turning down ‘free’ money.
Yes, you will have to pay in as well, but as you will see shortly, contribution levels start low and only rise gradually.
If you are one of the people who aren’t paying enough into a pension, can you really afford to turn down ‘free’ money?
#3: Affordability and lack of spare cash
This is the biggest single reason people have opted-out, but contribution start low and only rise gradually.
For most people contributions will start at just 1% of their annual earnings between £10,000 and £41,865. So for someone earing the average wage of £26,500 per year, the monthly contributions will initially be around £12 per month, which will hardly break the bank for most people!
Contributions will then rise to 3% between October 2017 and October 2018 and then increase to 5%.
These gradual rises should make it easier for you to budget and will mean your pay packet isn’t hit for the full 5% immediately.
#4: Existing pensions
You might already have an existing pension, unless you have a huge pot, over £1.25 million, there is no reason why you can’t continue with your existing plan, whilst being automatically enrolled into a workplace pension.
If you can’t afford both then consider reducing your existing contributions so that you benefit from the payments your employer will make when you are automatically enrolled.
#5: Access to your pension has never been more flexible
Many people have chosen not to pay into a pension believing they are too inflexible at retirement; this is set to change.
From April next year, if you wish, you will have complete access to your pension pot when you retire. There will be no restrictions on how much you can take out, although anything over 25% will be taxed, and of course for most people they will need their pension pot to give them an income in retirement.
But, if your main reason for not paying into a pension is lack of flexibility in retirement, think again, things have changed!
#6: Age is no barrier
We suspect many older workers will simply opt-out, believing they are too close to retirement to benefit from Automatic Enrolment; this isn’t the case.
If you are close to retirement and don’t have enough in a pension pot then anything extra you can get from Automatic Enrolment will help. Remember too, that when you retire you can combine your pots so you don’t receive lots of small payments in retirement.
On the other hand, if you already have a significant amount in pensions, the extra you get from Automatic Enrolment could produce a handy lump sum (remember there are fewer restrictions after April 2015), which has been built up partly through the ‘free’ money from your employer and the taxman.
No matter how close you are to retirement Automatic Enrolment really can benefit you.
Questions? We’re here to help
Our advisers are experts; we’ve spoken to hundreds of employees about Automatic Enrolment to help them understand the changes and the benefits of staying in the pension.
If you have any questions or queries about how this affects you we’re here to help, call us on 0115 933 8433 or drop us a line at info@investmentsense.co.uk
