Auto enrolment
Enrolling into a pension at work
Starting from October 2012, employers will enrol workers into a workplace pension, if they meet the criteria below. When you pay into your pension, your employer and the government will contribute too. Find out how this affects you, when this will happen and the benefits.
Workplace pension – what it is
A workplace pension is a way of saving for your retirement arranged through your employer. It is sometimes called a ‘company pension’, an ‘occupational pension’ or a ‘works pension’.
How this affects you
Your employer will enrol you into a workplace pension if you:
- are not already in a pension at work
- are aged 22 or over
- are under State Pension age
- earn more than £7,475.00 a year
- work in the UK
Your employer will write to you to explain how the changes affect you.
You can choose to opt out of this pension, if you want to. But if you stay in you’ll have your own pension, which you get when you retire.
If you’re already in a pension at work and it meets the government’s new standards, this will not affect you.
Find out more about who this affects.
When this is happening
When you will be enrolled depends on the size of the organisation you work for. Very large employers are doing it first, in late 2012 and early 2013. Other employers will follow sometime after this, over several years. Your employer will give you the exact date nearer the time.
Why this is happening
People are living longer. You could be retired for twenty years and you need to think about how you’ll fund it.
The State Pension is a foundation for your retirement. But if you want to have more when you retire, you may want to consider contributing to a workplace pension. The full basic State Pension in 2011/12 is £102.15 per week for a single person.
The government is getting employers to enrol their workers automatically into a workplace pension so it’s easier for people to start saving.
Benefits of staying in a workplace pension
A pension is a way of saving money to provide you with an income when you retire. There are many benefits to having a pension at work.
Your employer will pay into it. This contribution from your employer means your pension can build up more quickly than if you were saving for your retirement on your own.
The government will also pay into it, in the form of tax relief. This means some of the money you earn, instead of going to the government as income tax, now goes into your pension instead.
Your workplace pension belongs to you, even if you leave your employer in the future.
As your employer will automatically enrol you into this pension, it’s a hassle free way of saving while you earn.
Being in a workplace pension is an important step towards giving yourself the lifestyle you would like in later life.
Savers left short-changed by unfair annuities system.
The report describes millions of private sector workers as saving for their retirement, whilst being stuck with a hugely unfair, opaque and bewildering annuity system. Worse still, it highlighted evidence of sharp practice and murky pricing in the annuity market putting unsuspecting consumers at a huge disadvantage. The £1bn loss could treble in size to £3bn over the next decade as the annuity market matures and as up to 8m people start being automatically enrolled into workplace pensions from 2012. Around 20% of these losses are passed on to the public in the form of lost taxes and higher means-tested retirement benefits.
When they retire, people in the private sector saving in a ‘defined contribution’ pension (now the most common form of company pension scheme) use their pension pot to buy a product called an annuity from an insurer. This gives them a regular income and is a one-off, irreversible decision that sets the size of their pension for the rest of their life. The process for choosing an annuity is a complex one and the majority still go for the ‘default’ option by sticking with their pension scheme provider. This failure to shop around for a better deal can wipe 30% off their annual pension income, and in some cases up to 50%.
The NAPF/PI report found that it is too difficult for savers to get the best deal when:
• 80% of savers have pots of less than £50,000, and most annuity advisers will not find it profitable enough to advise on pots of this size;
• Fewer than one in five people have the financial know-how needed to pick the right annuity at the best price;
• Those savvy enough to ‘shop around’ for the best rate struggle to do so because the best shops are not signposted;
• People get too little support from employers or providers when making a decision about their annuity.
The report, partly based on extensive interviews with companies that cover 80% of the annuity market, also discovered that in practice, annuity prices can be heavily manipulated:
• There is a severe lack of transparency and understanding about how annuities are priced, especially for those with medical conditions who could qualify for a much higher level of pension income;
• Annuity advisers say some insurers push rates downwards at certain pot sizes when they see a group of people approaching retirement, as they expect many will not look for a better deal and will accept the insurer’s first quote;
• Annuity rate bands can have ‘cliff-edges’ which mean that rates outside of the commonly quoted £50,000 and £100,000 benchmarks suddenly drop off and become much worse, penalising customers who could get a better rate by having as little as £1 more in their pot;
• Most savers pay commission when they buy an annuity. It is factored into the annuity rates of most providers – whether the saver gets advice on annuity choice or not!
If you want to find out more or need advice about buying an annuity, contact one of the team who will be happy to help
Spiralling cost of university prompts saving
Are you thinking of supporting your children to go to university? If you are starting a family or have a young family and are thinking that university should be where your children will go when they leave school, in say – 18 years time, then now is the time to face up to the reality of the likely cost.
If nothing changes in the way in which tuition fees and expenses have become part of the cost of being a university undergraduate, then the annual cost in 18 years time, according to a number of media sources, could average £120,000!
In the past, some parents have chosen to save for the cost of a place at an independent fee paying school, after putting the child’s name down for the school of their choice, in order to get what they felt would be the best school experience and education for their child.
Now, whilst you can’t put your child’s name down for a university place, access to higher education is also likely to come with a large price tag. Those parents wanting both places for their children at fee paying schools and university could find themselves with dramatically increasing outlays year on year, for a considerable part of their lives. With such long-term costs, limiting the size of one’s family might become a decision mainly determined by the anticipation of future affordability.
New parents now might need to consider investing around £3,000 a year to cover the cost of sending one of their children to university, a figure which might need to be considered by some alongside the cost of school fees. On past performance of long term investment funds, £3,000 might just about grow to yield £120,000 in 18 years time!
It is possible that if the national financial situation improves, then the need for universal and affordable access to higher education in universities could become a greater priority across the UK. Is the Scottish model a dying last attempt to control the cost to individuals or is it a beacon for future change elsewhere? In the UK, we have for the last 100 years sought to provide fair and affordable access to educational opportunities.
Has this now changed permanently or can parents rely on a future national change of heart and circumstances, within the next 18 years, to restore universal access to university as an affordable entitlement? If not and you want the best education for your children to include a university place, then you must already be able to see your way to paying for it, or you had better think how you might do it and start saving!
If you want to find out more or need advice about long-term savings and investments for families and educational futures, contact one of the team who will be happy to help.
What does the Bank of England MPC do
A very powerful voice in the world of UK business and finance, the Bank’s Monetary Policy Committee (MPC) sets interest rates. In setting an interest rate, the MPC judges that the rate will enable the UK’s inflation target to be met.
The Monetary Policy Committee, MPC, is made up of nine members – the Governor, Sir Mervyn King; the two Deputy Governors; the Bank’s Chief Economist; the Executive Director for Markets and four external members appointed directly by the Chancellor. The appointment of external members is designed to ensure that the MPC benefits from thinking and expertise in addition to that gained inside the Bank of England.
The MPC meets every month to set the interest rate. Throughout the month, the MPC receives extensive briefing on the economy from Bank of England staff. This includes a half-day meeting – known as the pre-MPC meeting – which usually takes place on the Friday before the MPC’s interest rate setting meeting. The nine members of the Committee are made aware of all the latest data on the economy and hear explanations of recent trends and analysis of relevant issues. The Committee also hears about business conditions around the UK from the Bank’s Agents. The Agents’ talk directly to business, to gain insight into current and future economic developments and prospects.
Whilst the MPC members each have expertise in the field of economics and monetary policy, each does not represent an individual group or finance area – they are required to be independent. Each member of the Committee has a vote to set interest rates at the level they believe is consistent with meeting the inflation target. The MPC’s decision is made on the basis of one person, one vote. It is not based on a consensus of opinion. It reflects the votes of each individual member of the Committee.
A representative from the Treasury also sits with the Committee at its meetings. The Treasury representative can discuss policy issues but is not allowed to vote. The purpose is to ensure that the MPC is fully briefed on fiscal policy developments and other aspects of the Government’s economic policies, and that the Chancellor is kept fully informed about monetary policy.
The monthly MPC meeting itself is a two-day affair. On the first day, the meeting starts with an update on the most recent economic data. A series of issues is then identified for discussion. On the following day, a summary of the previous day’s discussion is provided and the MPC members individually explain their views on what policy should be. The Governor then puts to the meeting the policy which he believes will command a majority and members of the MPC vote. Any member in a minority is asked to say what level of interest rates he or she would have preferred, and this is recorded in the minutes of the meeting. The interest rate decision is announced at 12 noon on the second day.
The MPC goes to great lengths to explain its thinking and decisions. The minutes of the MPC meetings are published two weeks after the interest rate decision. The minutes give a full account of the policy discussion, including differences of view. They also record the votes of the individual members of the Committee. The Committee has to explain its actions regularly to parliamentary committees, particularly the Treasury Committee. MPC members also speak to audiences throughout the country, explaining the MPC’s policy decisions and thinking. This is a two-way dialogue. Regional visits also give members of the MPC a chance to gather first-hand intelligence about the economic situation from businesses and other organisations.
In addition to the monthly MPC minutes, the Bank publishes its Inflation Report every quarter. This report gives an analysis of the UK economy and the factors influencing policy decisions. The Inflation Report also includes the MPC’s latest forecasts for inflation and output growth. Because monetary policy operates with a time lag of about two years, it is necessary for the MPC to form judgements about the outlook for output and inflation. The MPC uses a model of the economy to help produce its projections. The model provides a framework to organise thinking on how the economy works and how different economic developments might affect future inflation. But this is not a mechanical exercise: given all the uncertainties and unknowns of the future, the MPC’s forecast has to involve the input of individual member judgements about the economy.
If you want to find out more or need advice about the implications of the MPC decisions for you or your business, contact one of the team who will be happy to help
