Pensions, particularly Workplace Pensions, are quite often considered to be confusing. Please see Tom Selby of A J Bell’s article below explaining a little about Auto-Enrolment contributions.
A reader wants to know why the sums don’t add up with retirement savings
Thursday 05 May 2022 Author: Tom Selby
I’m being automatically enrolled into a workplace pension scheme and was told this would be 8% of my salary. However, I’ve just done the sums and my contribution works out less than this – can this possibly be right? I also have a friend who hasn’t been auto-enrolled at all. Are we being shafted by our employer?
Spencer
Tom Selby, AJ Bell Head of Retirement Policy says:
Under auto-enrolment rules, all employers, regardless of size, are required to enrol staff in a pension scheme and pay a minimum level of contributions.
The reason for the reforms was simple – millions of people weren’t saving for retirement. While lots of organisations had a pension scheme, this wasn’t a legal requirement. Even where there was a scheme, plenty of employees simply didn’t join.
Auto-enrolment was first introduced in 2012 for the UK’s largest employers, with medium and smaller employers brought in and contributions scaled up until 2019.
AM I BEING SHAFTED?
While I cannot rule out the possibility your employer isn’t playing by the rules, the answer is likely a lot simpler.
Under auto-enrolment legislation, employees are required to contribute a minimum of 4% and employers 3%, with a further 1% coming via basic-rate tax relief – taking the total to 8%. Employees have the option to opt out of the scheme if they want to, although they miss out on the employer contribution if they do.
However, the minimum requirement is 8% of ‘band earnings’ rather than 8% of total earnings. For 2022/23, the earnings that qualify for minimum auto-enrolment contributions are those between £6,240 (the lower earnings limit for National Insurance contributions) and £50,270 (the upper earnings limit).
Take, for example, someone earning £20,000 a year. If their 8% contribution was based on their total earnings, they would expect £1,600 in total to go into their pension during the 2022/23 tax year.
But if the contribution is based on band earnings, then it will be 8% of (£20,000 – £6,240), which is £1,100.80.
WHAT ABOUT MY FRIEND?
There are various legitimate reasons your friend might not have been auto-enrolled.
If they are under 22 years old or over state pension age (66) then they will not qualify for auto-enrolment, although they have the option to opt-in.
If they have earnings below £10,000 (the auto-enrolment earnings ‘trigger’) they also will not qualify for auto-enrolment, although again they have the option to opt-in if they want to.
Furthermore, employers have the option of not auto-enrolling new joiners for the first three months of their employment.
As an IFA & Employee Benefit Consultant, and an employer, I understand both the value of pensions and how we need to clearly communicate with staff about pensions and employee benefits. Pension contribution rates can make a significant difference over time to the value of your total pension funds on retirement. And whether or not you can afford to retire early!
Communication can be key. Employees need to know what pension provision they have got, what they might need to retire, forecast how it may grow, and how they can make up any potential pension fund shortfall.
Steve Speed 06/05/2022