In 2008 the
government introduced new pensions laws designed to get people saving. The idea
is to help people to save by giving them access to a workplace pension scheme
so they don’t have to rely on just the State Pension.
Workplace pensions
were launched back in October 2012 to address the problem of people living
longer but failing to save enough money for retirement. It is aimed at the
private sector where less than 25% of the workforce were saving for retirement
compared to over 90% enrolled in their employers pension scheme in the public
sector.
Under the new rules, every employer has to
give their workers the opportunity to join a workplace pension scheme that
meets certain standards. Depending on how old they are and how much they earn,
many workers will be automatically enrolled into the scheme. Other workers will
be entitled to join the scheme if they want to.
Workers earning over a certain amount will also
be entitled to a minimum contribution into their retirement pot. It’s usually
made up of money taken from the workers’ pay, money paid in by their employer
and money from the government, although employers can pay the entire minimum
contribution themselves if they want to.
The minimum
contribution has been introduced at 2% of a worker's pay. This will rise to 5%
from April 2018 and then to 8% from April 2019. Everyone aged 22 yrs and over
and earning at least £10,000 per year must be enrolled. So far, around 8
million have been signed up and when the scheme is fully rolled out it is
estimated that some 10 million workers will be enrolled in a workplace pension.
Some Providers
In addition to
the more established pension providers such as L&G, Standard Life and
Aviva, there are some newer providers for employers to consider. Some of the
more popular new providers include NEST, NOW:Pensions and The People's Pension.
The
National Employment Savings Trust (NEST) is the auto-enrolment
programme set up by the Government to support the launch of the auto-enrolment
initiative.
NEST is effectively a public body that’s accountable to the
Department for Work and Pensions
Most NEST savers are expected to invest their pensions in
retirement date funds – also known as target date funds. These are funds that
are managed on the basis that you’re most likely to retire in a particular
year.
So if your most likely retirement date is 2025, your pension
will be invested in the 2025 retirement date fund. If your most likely
retirement date is 2055, you’ll be invested in the 2055 fund.
If you’re joining NEST in your 20s, your early
contributions will mainly be invested in low-risk assets. Only about 30-40% of
your cash will be invested in the stock market. This provision is to protect newly enrolled workers from the shock of a dramatic market fall.
For example, imagine
that NEST invested 90% of all Foundation phase investments into equities. Let’s then imagine that the stock market had a bad year and fell by a
quarter. If that happened, there’s a big danger that young savers would be very
upset and opt out from auto-enrolment for many years to come.
But if twentysomethings have a lower risk portfolio, they’re
more likely to carry on paying into their pension for the rest of their working
lives.
NEST is low cost
with an annual charge of 0.3% on all your assets plus 1.8% when you first
invest the money. So if you invested £1,000 this year, you’d pay a
'contribution charge' of £18, and if your total pot was worth £10,000, you’d
pay a £30 annual charge. If you invested a further £1000 next year, you'd be
charged a further £18 contribution charge on that fresh investment.
NOW:Pensions is backed by
Danish retirement specialists ATP, which has run the Danish National Pension
for more than 45 years. NOW:Pensions has used its experience in Denmark to put
together an interesting investment approach. Indeed, there’s just one default
investment plan.
Your
money is split across five different risk classes including Government bonds, index-linked Government and other bonds, equities and commodities.
During the savings phase, the cash will be invested in the
classes listed above through the Now: Diversified Growth Fund. On reaching the
pre-retirement phase (ten years before your planned retirement date, though you
can change this to five or 15 years before that date) the money will start
being moved into less risky investments contained in the NOW: Retirement
Countdown Fund.
There’s a 0.3% annual management charge, coupled with a
monthly administration fee of £1.50 (which falls to 30p for those earning less
than £18,000 a year, at least initially).
The firm behind The
People’s Pension is B&CE, a company which has managed workplace
pensions – particularly in the construction sector – for more than 30 years.
There are three profiles to choose from which will determine how your money is
invested: Cautious, Balanced and Adventurous. If you’ve stuck to one of the
three main profile funds, your money will automatically be moved into more
secure investments on a gradual basis from 15 years before the planned retirement
date.
One of the big attractions of The People’s Pension is that it
is a not-for-profit organisation, which means that the charges are relatively
low – there’s just a simple, flat 0.5% annual management charge to pay. That’s
much easier to get your head around than the NEST fee structure of 0.3% per
year plus a 1.8% contribution charge.
Some Concerns
Millions are
now signed up to a workplace pension but the first area of concern would be
that contributions are taken after the first £5,876 of pay is ignored. So, from
2019, someone earning £15,000 will only pay in a total of 4.8% not 8%.
Secondly, the
maximum level of income eligible for the scheme is currently £45,000 - no
deductions are made on earnings above this figure.
Thirdly, there
may be a further 10 million self employed as well as those who work part time
and earn under £10,000 or who have several jobs each paying less than £10K and
who do not qualify for auto enrolment. The government are currently reviewing
the system to find a way to include such workers. It is estimated that as few
as 1 in 7 self-employed are saving via a private pension.
I firmly
believe the government should take a look at increasing the 8% minimum (4%
employee, 3% employer and 1% tax credit) as this is not likely to provide much of a pension
for many workers.
Someone earning
£15,000 who joins the scheme at age 37 and pays in for 30 years would amass a
pension pot of around £75,000. This would be sufficient to give a drawdown
pension of just £3,000 p.a.
This much needed addition to help workers save
for their retirement is definitely a
good start but this appears to be a 'one size fits all' approach where someone
in their early 20s will contribute the same proportion of income as a worker in their 40s or 50s.
There is a rule of thumb which suggests people should contribute half their age
as a percentage into a pension. Someone aged 30 would pay in 15% of their wage
and a worker aged 50 would pay in 25% for example.
There needs to be some review process or
dashboard which can show every individual what level of payment they can expect
based upon the percentage they contribute and the length of time before they
expect to take pension benefits from their plan.
In the absence of significant developments to the
current system, I suspect many workers will be disappointed with the levels of
income in retirement.
If you are paying in to a workplace pension or
have any general thoughts please feel free to leave a comment below.