Want free money from your employer? Pick its pension
Existing staff schemes can still pay most as firms face big reforms
Workers are being offered last-chance invitations to join company pensions that could dramatically boost their retirement wealth. A big shake-up of workplace pensions starts in October. New laws will force employers to sign up all staff and pay in modest sums.
But many firms already offer deals that are more generous than the Government minimum. And they are making one last push to encourage workers to join their existing schemes – the aim is to simplify their payroll administration by getting staff i nto the current arrangements.
Crucially, workers are likely to be better off joining existing schemes. The extra money employers are willing to pay in from day one should produce a bigger pension.
Under the new automatic enrolment rules, employers will have to pay only one per cent of salary to a pension until 2017. At present, the average employer payment into a pension is 6.2 per cent.
Take a worker on average earnings of £26,200 who signs up to a company pension on January 1. Over the next ten years, just over £22,650 would be paid into their pension pot, assuming average employee and employer contributions and annual pay rises of three per cent. Under the auto-enrolment minimum, that worker would see just £11,630 added to the pension fund.
Jason Witcombe, a chartered financial planner with adviser Evolve in the City, says in most circumstances staff should grab the offer of joining the present pension scheme. ‘Whichever way you look at it, pension contributions are free money from your employer,’ he says.
‘I suspect if it were called anything other than a pension, most people would have signed up on the day they joined.’
Julian Webb, head of workplace savings at investment manager Fidelity, says: ‘We expect about one quarter of the firms we work with to be taking steps to encourage workers to join existing schemes ahead of the auto-enrolment deadlines.’
He cites one company with 10,000 staff, which will next month write to all workers who are not in its pension giving them three months to join. If they do not accept the offer, they will no longer be eligible and will instead have the less generous deal through auto-enrolment.
The Government has set out a timetable for companies to start enrolling staff into a pension. The start is being staggered over five years from October. The biggest firms with 120,000 or more staff – such as Tesco and Sainsbury’s – will go first. Then each month more companies come on board, stepping down in size month by month.
About one third of all workers will be covered within the first six months. All employers with more than 250 staff will be included by February 1, 2014. Smaller firms will then be gradually brought into the net by April 2017. But firms do not have to wait for their ‘staging day’.
Nisha Minhas, 26, is a pioneer of
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new-style pension saving. Her employer, internet services company Fluidata, volunteered to try out the National Employment Savings Trust (Nest).
Nest has been set up to act as a central pension for firms that want a simple scheme for their workers.
Fluidata, which is based in offices near London’s Tower Bridge, does not have to auto-enrol staff until 2015. But it wanted to get started with a pension early to help attract and retain staff.
Nisha, who is a human resources manager, has been saving into the pension since April. She pays in two per cent of her salary and Fluidata contributes six per cent.
Nisha, who lives in Newham, east London, with her husband Suneep, 31, was keen to get started on saving, even though she is still repaying her student loans.
She says: ‘When I retire, I want to be able to afford to go on doing the things that I’m doing. And that means saving now.’
The money is invested into the Nest default fund. This invests in a mix of assets, including bonds and shares.
Nisha says: ‘The whole idea of having to go out and investigate different private pensions and do all the research was daunting. But joining a pension through your workplace is so easy and simple. The company has done all the work, so I just had to sign on the dotted line.’
There may be cases, though, where joining a company pension is not the best move. Witcombe says: ‘If you are carrying expensive debts, such as high balances on credit cards or payday loans, then your income is better used trying to pay these down.’
And Webb says there is little point in workers within a year or two of retirement joining a pension because there is not enough time to build a meaningful fund.
Workers who already have substantial pension funds need to be wary. About 100,000 people previously have registered for fixed protection or enhanced protection on their pensions.
These safeguard historic pension tax breaks, which are more generous than today’s allowances, on the condition that the worker pays no more into a pension.
However, if a saver inadvertently finds they are signed up through auto-enrolment, these protections are lost, potentially triggering extra tax bills when they retire.