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Auto enrolment – a perfect storm for pensions?

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Thursday January 9, 2014 at 10:00am
You may be wondering what Auto Enrolment is all about and even why the government is bothering with it. The scheme being introduced between 2012 and 2016 makes it compulsory for employers and employees to contribute to employees’ pension funds unless the employee opts out. Most smaller companies will not be affected by the changes until 2016 but it is important for all of us to understand why this is a big issue.

Why company final salary schemes are closing

Many private sector employers ran defined benefit pension schemes. These are the ones run by your employer where your pension was based on your final salary and years of service. Private sector membership of such schemes was 34% in 1997; it has now fallen to 8% as employers close such schemes.

The reason for their demise is easy to see, the amount of pension to be paid by the employer was a function of remaining life expectancy at retirement age, final salary, and interest rates and therefore annuity rates at retirement. Any shortfall in fund value was the responsibility of the employer. As these schemes close the responsibility (and risk) of providing an income in retirement falls to the individual.

Why state pension provision is being significantly cut

At the same time the state will no longer provide an earnings related pension for future retirees, this is being replaced with a flat basic rate pension worth around £144 per week in today’s money. At the same time the state pension age is rising. Also life expectancy is rising creating a bigger pool of pensioners requiring a pension for longer. The government is cutting state pensions to reduce public spending and at the same time acknowledging the state cannot afford to pay such generous pensions any more.

And against this backdrop the Office for National Statistics shows that employee membership of private pension schemes (that is the ones employees fund themselves) has fallen from 46% in 1997 to 32% in 2012.

The need for pension saving

So without being over dramatic we really do have an impending crisis. Almost all employer guaranteed pension schemes are closed and individuals are not saving anywhere like enough for a comfortable retirement. Think what £144 per week will pay for in today’s terms, which is why everyone needs to save for retirement.

To try and combat this we have a new national scheme to automatically enrol all workers onto a company pension scheme. Employees will be able to opt out once they have joined but this will go some way to ensuring employees of the future have private pensions.

For almost all of our clients they will probably opt out of the Auto Enrolment regime and instead have their own payments and the future compulsory payments of their employer paid into their existing private pension scheme. So when your time comes around think carefully before opting in, or out of Auto Enrolment consider your existing pension provision and make carefully calculated decisions.

Andy Parker
Chartered Accountant and Chartered Financial Planner

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Parker Chartered Accountants and Financial Advisors is the trading name for Parker Business Development Ltd (Registered No. 4116664), Parker Tax and Trust Ltd (Registered No. 06950353) and Parker Financial Planning LLP (Registered No. OC347027). Parker Financial Planning LLP is authorised and regulated by the Financial Conduct Authority. All companies are registered in England and Wales – registered office contact details here