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Auto-enrolment – what do I need to know?
Monday is set to be a big day for both workers and companies, with the biggest pension shake-up ever coming into force.
From Monday next week (1 October), all firms will have to start enrolling eligible workers into company schemes. The Government has been paying tribute to the controversial new scheme, insisting it will result in more than half a million UK workers saving into a pension for the first time by Christmas.
The scheme has also been praised for giving many lower-paid workers the chance to put money away for their retirement for the first time.
However, with the recession rumbling steadily on, many workers are already struggling to make ends meet, without the extra pressure of paying into their pension fund. So, just how much will eligible workers have to pay?
To begin with, 1% of your salary will be automatically deducted. However, this does include tax relief so you will really only be ‘losing’ 0.8% of your net pay. In addition to this, your employer must also contribute a further 1%. But these amounts will be hiked come 2018, when workers will pay in 5% (4% of net pay with tax relief) and employers will add 3%.
If this sounds like a lot to you, you may be wondering whether you can opt out of the scheme. Workers are not obliged to join – but if you opt out you will miss out on contributions from your boss and tax relief. Whatever you decide, rest assured that you can change your mind at any time.
Most importantly, perhaps, will the scheme actually work? One of the main problems with auto-enrolment is that Brits are finding it tough to cover the cost of everyday living as it is, especially with pay freezes and regular price hikes. The priority for these workers is the here and now, rather than the future.
The other issue is that workers in existing schemes could lose out. Many employers currently pay 6-10% into their worker’s pension pot, but under auto-enrolment employers put in just 1% of a worker’s gross salary (3% by 2018). Thus pension savings could actually diminish under the new Government scheme.
With current pensioners struggling on meagre funds, many Brits have their fingers crossed the Government’s praise for the scheme will ring true, and that they will be able to live comfortably in their old age.
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