What is auto enrolment?
Please note this blog post was published over 12 months ago and so may not include the most up-to-date information, for example where regulation around investing has changed.
You’re likely to hear a lot on the news about auto enrolment in the coming months, with changes set to be made to the minimum contributions for workplace pensions. Auto enrolment is simply the process of your employer establishing a workplace pension for you.
By law, an employer must auto enrol you on to a workplace pension if you are aged between 22 and state pension age, earn over £10,000 a year, and work in the UK. The idea behind this is it helps you to help yourself, you’re automatically opted in to investing for retirement. Auto enrolment aims to ensure we all put aside enough money to live on in retirement.
If you fall outside these criteria, you may still be able to opt in to your auto enrolment pension – speak to your employer to find out.
The current minimum you pay is 3%, the current minimum your employer pays is 2%, for a 5% total minimum contribution. The government adds tax relief, which essentially means free money, it means your contribution actually works out as 2% from your employer, 2.4% from yourself, and tax relief at 20% which works out at 0.6%, to give you the combined 5%. The same tax relief is applicable.
The pension scheme you are auto enrolled on will typically be invested in funds that aim to grow your money over time. Compounding of this growth, alongside continued contributions, could build into a nest egg that eventually gives you enough money to afford retirement.
It makes sense to start this process, and contribute as much as you can, early in your career, giving you the time to build a retirement fund that is suitable. After all, affording your lifestyle without a salary is going to require a serious amount of money to be put away. Use the calculators on tpinvestor.com to get an idea of how much time it will take to amass a goal amount. Investing in the potential growth of a Pension or Stocks & Shares ISA, compounding growth and continuing to invest is perhaps the most reliable road to retirement. Auto enrolment gets this process going, with help from your employer and the government. Whether you get going early with investing for retirement, or are just getting going later in life, every penny ultimately does count towards a potentially more valuable future when you consider the benefits of compounding growth.
Most pension schemes set an age when you can take your pension, usually between 60 and 65. In some circumstances you can take your pension early. The earliest you can take your Pension is currently 55 years of age. With time on your side, with little and often contributions, auto enrolment can help you realise your retirement goals.
The great thing about auto enrolment is that it saves you a lot of hassle and you get money for your future from your employer and the government. You’re automatically being set up for a brighter future. The best thing you could do is look to see if you could afford to increase your contribution, potentially getting you closer to your retirement goal and giving you more money to play with in retirement.