- Auto enrolment was set up to encourage saving for retirement.
- A Pension fund is a tax efficient way of saving for retirement, but most cannot access the fund until they are 55 years old (this will change to 57 in due course).
- Subject to the rules, you, your employer and the Government will pay into a pension pot in your name which you can take when you reach 55 (57 later).
- The minimum that must be paid in from the start is 2% of your pensionable earnings (that is income between £5,824 and £42,385 per year) until September 2017, of which an employer’s minimum is 1%. In October 2017 the minimum figure goes up to 5%, of which an employer’s minimum is 2%. From October 2018 the minimum will be 8%, of which an employer’s minimum is 3%. You can put more in if you wish.
- The Government usually contributes to your pension through tax relief – they top up what you pay in (so that some of your money that goes to the Government as tax, goes into your pension instead).
- On your payslip, you will see the contributions that you make. You won’t see the tax relief because the amount you pay in net of basic rate tax. That tax is added to your pension separately.
You may be able to increase the amount you put in personally, subject to certain limits. If you do, the amount contributed by Government in tax relief would also increase. The Government’s contribution is currently 25% of whatever you pay in. The KiddyKare contribution would remain unchanged though.
You may also be able to transfer in any other pensions you may have.
You will receive a statement from the provider once a year showing how much went into your pension, what it is worth and how well it is doing. If you need advice on the scheme you consult an independent adviser or one of the free services available.
EXAMPLE (all figures are subject to change)
For someone earning £10,000 per year, the estimated annual contributions payable in the three years to 30th September 2019 would be:
Minimum Contribution : Employee : 0.8% x ( 10,000 – 5,824 ) = 0.8% of £4,176, = £33.40, rising to £100.20 from 1/10/17 and to £167.00 from 1/10/18, a total of £300.60
Minimum Contribution : KiddyKare : 1% x ( 10,000 – 5,824 ) = 1% of £4,176, = £41.76, rising to £83.52 from 1/10/17 and to £125.28 from 1/10/18, a total of £250.56.
Government Contrib ( Tax relief ): 25% of employee’s net contributions = £75.15
Remember, of the Total of £626.31, £300.60 would be paid by you, £325.71 is free money !