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thinkmoney's guide to the new flat-rate state pensions and automatic enrolment

Published 10 January 2013 by

There have been a number of changes to the pensions system recently, and it can be hard to keep up. If you're looking for a simple guide to recent pension reforms - especially state pensions and automatic enrolment - read on.

A quick guide to the new flat-rate state pension

Why is this new system being introduced?

Until now, the full state pension (currently £107.45 per week) can sometimes be topped up to £142.70 per week with the second state pension and pension credit.

Steve Webb, the pensions minister, has called this system 'fiendishly complicated'. He wants to introduce "a simple system, not a more expensive one... that will help people plan for their retirements."

What's changing?

Starting in April 2017, a new 'flat-rate' state pension will offer a weekly payment of £144 (plus any inflation rises between now and 2017). This means that there will only be one state pension to consider - instead of having to think about a second state pension and pension credit too.

When will flat-rate pensions be introduced?

It will be introduced in April 2017.

Who will get the state pension?

It is expected that you will be eligible for the new flat-rate pension if:

  • You are due to hit state pension age after 6th April 2017
  • You have paid National Insurance (NI) contributions for at least 10 years

If you have paid National Insurance for less than 35 years, you may receive a reduced state pension.

Who will it benefit?

A spokesperson from the charity the Pensions Policy Institute, Chris Curry, said that these changes will most benefit self-employed people and women - who have not traditionally fared as well under the old system.

thinkmoney's guide to automatic enrolment

On top of the state pension, many people also pay into their own pension. At the start of October 2012, automatic pension enrolment began to come into force.

It means that certain employees will be automatically enrolled into their workplace pension scheme. This is intended to encourage them to save more for their retirement, so they don't just have to rely on the state pension.

The Pensions Regulator wants people 'to be automatically enrolled into good quality schemes that are effectively governed, durable and offer value for money'.

Even though many people have been enrolled - or are set to be enrolled - a lot of them still don't really know what they're getting into.

If you have any questions about automatic pension enrolment, thinkmoney may have answered them below.

Will I be automatically enrolled?

You will be automatically enrolled if you are:

  • Aged 22 or over
  • Not in a suitable workplace pension scheme already
  • Below state pension age
  • Earning more than £8,105 per year
  • Working in the UK

If you're not sure whether you meet the criteria above, click here to take a test and see whether you'll be automatically enrolled.

I don't meet the criteria - can I still be enrolled?

Even if you don't meet the criteria above, you can still ask your employer to enrol you.

If you're aged between 16 and the state pension age, and you earn over £5,564 per year, your employer will put you in the scheme and make a minimum contribution to your pension.

If you earn less than that, you can still be enrolled but your employer doesn't have to make any contributions for you (though they can if they want to).

When will it happen?

Automatic enrolment started on 1st October 2012 - but not everyone was enrolled on that date. The larger companies are starting first, and everyone else will be enrolled gradually over the next five years.

Ask your employer if you're not sure.

I'm already paying into a workplace pension - will I be affected?

If you're already paying into a workplace pension then you won't be automatically enrolled. However, if your current scheme falls short of the standards set by the Pensions Regulator then your employer will either have to change the scheme or start a new one.

What if I don't want to take part?

You can opt out at any time. If you do this within a certain timeframe, you'll get back any payments you've already made.

If you opt out after this deadline, any payments you've made will remain in your pension pot.

You are free to make alternative pension arrangements for yourself if you opt out of your workplace pension.

Can I change my mind after I opt out?

If you opt out - but then change your mind - you can opt back in. Your employer will automatically 're-enrol' you every three years if you meet the criteria above.

This will give you a chance to reconsider whether you want to be in the scheme or not. If you don't want to be, you can opt out again.

How much will I have to pay into my workplace pension?

In a defined contribution pension scheme, a certain percentage of your earnings will have to be paid in.

This is made up of contributions from you, your employer and tax relief (some money that would've gone to tax goes into your pension pot instead).

At the moment, the minimum percentage that has to be contributed in total is 2% of your earnings. In October 2017, this will go up to 5%, and from October 2018 it will be 8%.

These minimum percentages apply to anything you earn over a certain minimum (£5,564 at the moment) and up to a maximum limit of £42,475.

You can contribute more if you want to, and your employer may also choose to contribute more.

What will happen to my money once it's in my pension pot?

Once your money is inside your pensions pot, the organisation running your scheme will invest it.

You'll be able to choose how risky you want your investments to be. The default option will start very safely, get a bit more risky during your middle age to try and make a big return, then go back to safe again as you approach retirement.

Your pension provider will also take a charge from your pot automatically each year.

How much could I save?

It's really hard to predict how much you could have saved by the time you get to retirement.

It depends on the success of your investments, changes to your earnings, and the age at which you retire.

The BBC, however, has worked out that a 30-year-old who:

  • Earns £20,000 per year
  • Gets a pay rise of 1% above inflation each year
  • Makes the minimum contributions
  • Has investments that make a small but regular return
  • Retires at 70
  • Will receive a yearly pension of £2,100 at today's prices. That's about £96.24 going into their pension pot each month (£48.12 of which is taken from their take-home pay).

What if I'm not very good at saving?

That's the beauty of automatic enrolment - you're effectively 'forced' (though you can opt out, of course) to save. So even if you've never gotten into a savings habit, you'll still be putting money away.

However, as the above example illustrates, it may not be enough to contribute the bare minimum you need to live on.

If you can, it's a good idea to contribute more, for a more comfortable retirement.

If you doubt you'll be able to save more because you're not very good at organising your money, there are services that can help.

For example, if you have a thinkmoney Personal Account, a Money Manager can go through your budget with you and help you to work out how much you could afford to put into savings - such as your pension pot - every month.

Once you've decided on a comfortable figure, your Money Manager can set up a Direct Debit for you, ensuring that this money leaves your account each month.