Most workers in the UK are automatically enrolled on a pension scheme by their employer, in a process known as auto-enrolment. But those relying on their workplace pension might discover that they haven’t saved enough to retire comfortably.
What Exactly Is the Workplace Pension?
Automatic enrolment, which began in October 2012, is a UK law that means that employers must automatically enrol workers on a pension scheme. It’s part of an effort by the government to help workers save enough for retirement, given that the State Pension is now worth just £22 per day. While workers are enrolled automatically, they still have the right to opt out of any scheme.
It’s important for employees to realise that not all workplace pension schemes are equal. Police officers and politicians, for example, will often have excellent workplace pensions. In this article, we’ll discuss the minimum pension contributions for a workplace pension.
What Is the Minimum Pension Contribution in the UK?
The minimum pension contribution is calculated as a percentage of an employee’s “qualifying earnings”, rather than their whole pay package*. For the tax year 2018 to 2019, qualifying earnings are anything over £6,032 and under £46,350.
From April 2019, workers will see 5% of their qualifying earnings diverted into a pension pot. Their employers will put an additional 3% into the pension pot and the government will also add a small amount from tax relief.
Let’s look at an example to see how this works in practice. If you earn £26,032 per year before tax, then your qualifying earnings will be £20,000. Each month, you’ll put 5% of your monthly payments into a pension pot (£83.33). Your employer will add a further 3% (£60). You’d also get £20.83 as tax relief from the government, making your monthly pension contribution £164.16.
*Note that some employers make contributions based on an employee’s whole pay package, rather than qualifying earnings. Check with your employer to see which version of the scheme your company uses.
Is the New Workplace Pension Enough to Retire On?
Let’s return to our worker earning £26,032 per year (which is just under the UK average). To keep things simple, let’s say that they start work at 22 (the age at which auto-enrolment starts) and work continuously until they are 65. They are also paid the same amount every year. Research suggests that if they make the minimum monthly pension contribution for 43 years, their pension will be worth just £15,736 per year when they retire. This amount, which is less than the current annual minimum wage, includes the State Pension.
It might be just about possible to survive on that amount, but it’s a long way off what you would need for an enjoyable retirement!
Who Else Is Let down by Auto-Enrolment?
We’ve already established the fact that it will be difficult for most people to retire comfortably on their workplace pension alone. But who else might see very limited benefits from an auto-enroled pension?
Older workers without an existing pension pot
There are other categories of people who might be let down by auto-enrolment. If our worker is 40, rather than 25, and has only just started saving for their pension and making National Insurance Contributions (NIC), then their pension will be worth just £3,720 per year.
The self-employed and freelancers
Self-employed people and freelancers are not auto-enroled into any kind of pension scheme. Instead, the onus is on the individual to set up a savings account, which they can pay into every month/year, or sign up for a pension scheme on their own.
Anyone earning less than £10,000 per year
People earning less than £10,000 are not automatically enroled, so will not get any kind of workplace pension. This includes all part-time workers on the minimum wage.
Those who want to retire early
It’s also worth considering those who want to retire early. A workplace pension can only be accessed by individuals aged 55 or older. Someone who plans to retire earlier than this may want to access their pension pot and invest the capital more productively. One way to do this is through a Self-Invested Personal Pension (SIPP), which could be invested in property.
The Traditional Model Doesn’t Work… But Is It Possible to Do Something Different?
If you’re one of the many people who will see limited benefits from your workplace pension, there are a couple of important things you should know. The first is that your workplace pension is optional. Though you might be enroled automatically if you qualify, you retain the right to opt out.
The second is that, since the “Freedom and Choice” reforms in 2015, savers have much more control over managing their pension. One example of this is a SIPP. With a SIPP, or a Self-Invested Personal Pension, the saver can decide how their pension should be invested. Traditional pensions must be invested in low-risk, low-reward environments, such as annuities, but a SIPP offers much greater flexibility and can even be invested in commercial property.
Are you planning to retire early and invest your pension into property? Contact The Landlord’s Pension to discuss your retirement fund with one of our friendly pensions advisors.