If you’re a worker in the UK then you already know about auto-enrolment.
In fact, you’re probably already part of it – but for a quick recap, it’s the government’s initiative to have employers sign their staff up for a suitable pension scheme.
It’s designed to address the issue of low income retirement: while most people will be eligible for a state pension, it won’t necessarily be enough to cover the burgeoning costs of modern life.
By now, most people will have already been enrolled onto their company’s scheme, and paying 1% of your salary into a pension fund each month will feel like old news. So you might have wondered why auto-enrolment has suddenly reappeared in the headlines.
Well, the 1% that you’re currently paying is actually just the beginning. In order to ensure that these pension funds grow at a reasonable rate, the automatic contribution amounts are about to rise.
At the moment, you pay 1% and your employer also pays 1%. As of April 5th, your contribution will triple to 3%, whilst your employer will start putting in 2%.
From April next year, that becomes 5% for you and 3% for your employer, meaning that a total of 8% of your salary will be going into the pension pot each month.
In real terms, the average British worker is currently stashing away a monthly sum of around £169. From April that becomes £517; from 2019, £876.
Is it mandatory?
No. Whilst auto-enrolment is automatic, you can choose to opt out if you wish to. For instance, if you already have your own private pension fund, and you are contributing to it regularly, you might not need this additional fund.
Even then, though, you might want to think twice before leaving a scheme that sees you gain free money from your employer.
Opting out if you have no alternative is something that you should think very carefully about. Expert advice is, generally, that you should be trying to save money towards your pension unless doing so is going to cause real financial hardship.
So whilst you shouldn’t be missing debt repayments in order to meet pension contributions, it probably is worth trimming non-essential spending.
Can I make a smaller contribution?
If you want, you can opt out of the contribution change and continue to pay in just 1%. This may be an interesting option to people with squeezed incomes, but it comes with a serious downside: choose the so-called ‘opt-down’ and your employer will be allowed to stop making contributions all together.
I’m a young adult. Isn’t it too early to be thinking about pensions?
We get it. Maybe you’re saving for a deposit or you want money to see the world. Maybe you’re just starting out in your career and you’re still earning a junior-level paycheque. Whatever it is, it shouldn’t stop you from thinking about the future.
Whether you choose to keeping making the recommended contributions or not, the important thing is that you are making a conscious decision based on careful consideration of the future. The sooner you start to plan the better – so no, you’re never too young.