Auto-Enrolment – contribution increases and opting out
Auto-enrolment started in 2012 as a way of encouraging people to start thinking about and planning for their retirement, as opposed to relying on the state pension. As of April 6th this year, along with a rise in employer contribution levels, employees will also see their auto-enrolment contributions rise.
Prior to 6th April, the minimum pension contribution for auto-enrolment was a total of 2%: 1% contributed by the employee and 1% from the employer. As from 6th April, the contribution rate has risen to 5% overall, made up from 3% from the employee and 2% from the employer. For some workers on lower pay rates, this increase may feel considerable and unaffordable. In real terms, for the average earner, the increase will amount to around £30 per month.
In some schemes, it may be possible for workers to pay in at a lower rate but choosing to do so will probably mean opting out of auto-enrolment as you won’t be paying into a qualifying scheme. However, if the employee opts to pay 1% and the employer agrees to contribute 4%, the statutory minimum requirement of a 5% contribution is being met and therefore will be part of a qualifying scheme.
Employees do have the option of opting out. If you want to receive a refund of contributions paid, the payroll department must be notified within one calendar month – (i.e. before May 6th). Payroll will stop deducting further contributions with immediate effect. It is possible to opt out after the one-month period, but contributions may be lost depending on the pension scheme policy. It would be advisable to check this prior to opting out.
Having opted out, you can opt back in at any point. Whether you request it or not, your employer is required by law to automatically reinstate you every three years. Should you wish to opt out again, you can.
Before opting out, it would be wise to consider why auto-enrolment is happening. This scheme was put in place to encourage the public to start saving for retirement, consistently and continuously. Auto-enrolment gives you the opportunity to have your employer contribute to that retirement pot. Opting out will mean losing the right to an employer-matched contribution.
Contributions will rise next year
Next year, pension contributions for auto-enrolment will rise to 8%, and you need to be prepared for that eventuality. Before withdrawing from the scheme though, consider the recommended rate for saving for a comfortable retirement is recommended at between 12% and 16%. Therefore, when it comes to opting out of auto-enrolment, the advice is – don’t! Auto-enrolment should be considered merely as a starting point for saving for your future. Even if you have alternative pension plans in place, auto-enrolment diversifies your investments and has the added benefit of employer contributions. Consider the employer contributions as a pay rise, deferred until your retirement.
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