Monday might not have seemed like a particularly important day to you. But to the pensions industry it really was, because it was the day in which their battle to get their hands on the savings of almost everyone in the country finally came to fruition.
Britain’s new auto-enrolment pensions system, under which all businesses will eventually have to provide and contribute to a pensions scheme for their employees, has begun. At the moment, employees (unless they make the effort to opt out) will be putting in a minimum of 1% of their salaries and employers will be topping that up to a total of 2%. However, over time contributions from both parties will rise so that by 2018 the minimum total will be 8% (of which 3% will have to come from the employer).
On the face of it, it is hard to see much wrong with this. We all know that as a nation we aren’t saving enough for retirement. We all know that saving into a pension makes its best financial sense if you get something from your employer as well as tax relief. And we all know that, while the state is supposed to provide uswith a pension safety net, it doesn’t really have the ability to free up the resources to come good on that commitment.
But the new scheme isn’t problem-free. Aside from cost issues (some schemes are still too expensive), there are also a few groups of people for whom the scheme is almost a guaranteed money loser. Those on very low incomes might find that it costs them more than they gain: by paying in they will give up current consumption only to find that the tiny retirement pot they build up while in work means they lose out on means-tested benefits later. A reason to opt out perhaps.
Those on very high incomes might find it doesn’t work for them either. A few years ago a lifetime limit of £1.5m was imposed on pension pots. At the time you could apply for “fixed” or “enhanced” protection on bigger funds – so as long as you made no more pension contributions you wouldn’t be hit with the new 55% taxon anything over £1.5m. That means that you’ll have to opt out before any auto-enrolment payments hit your account.
And you don’t just have to do it once. As The Daily Telegraph notes, anyone who opts out is automatically re-enrolled three years later. So you’ll have to remember to opt out again and again. If you don’t, it gets nasty. According to Ros Altman of Saga, if you have a pension pot of £1.8m, which loses its protection as a result of you not opting out, you could end up with a tax bill of £165,000 (55% of £300,000). High earners should find out when their firm will be starting auto-enrolement and ensure they opt out in good time.