Impact Of Pension Auto-Enrollment On Debt Management Plans

There is major concern about the future of the UK pension program and the government has taken action. According to new regulations, employers will auto-enrol many UK residents in pension schemes. By October 2014, approximately ten million people will find pension contributions automatically deducted from their salary.

If you have started a new job or auto enrolled for a pension this may change or affect your disposable income if you are already in a plan or planning on entering into a debt management plan or individual voluntary arrangement. We would usually require 1 month’s full payslip to check and verify your pension contributions.

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The majority of them will see their contributions increase steadily in the future. Though many people may welcome auto-enrollment in the pension program, those who are in debt may have some concerns.

Not everyone will be affected by auto-enrolment. People younger than age 22, those who are older than the state retirement age, the self-employed, and those who earn less than £8,105 per year will not automatically be enrolled in a pension scheme.

Between now and 2018, everyone else will be. Individuals working for large employers will be enrolled first and those working for the smallest employers will be the last to be enrolled.

Saving for retirement is a positive action and the employer will contribute to the pension as well

Even the government is helping by providing tax relief. However, this may not be enough financial assistance for individuals in debt management plans.

Most pension schemes will have a 0.8 percent initial contribution, which will increase to four percent within a few years. For a £2,000 salary, a four percent contribution equates to £80 monthly, which can be unaffordable to individuals on debt management plans.

Auto-enrollment raises some important considerations for a person using a debt management plan to eliminate debt. The importance of both clearing debts quickly and starting to save for a pension should be considered. If interest is being charged on debts, the debtor should determine whether it is more cost-effective to repay these debts before contributing to a pension.

Some people will conclude that extending the debt management plan timeframe is wise

This will allow them to benefit from pension contributions and tax relief. Those who are close to retirement age may decide that it is better to pay down their mortgages than make pension contributions.

People approaching retirement should also consider whether a pension contribution will affect their means-tested benefits entitlements during retirement.

The credit industry has not provided its thoughts regarding pension auto-enrolment. Each creditor is likely to have a different reaction. A formal debt management plan is based on the premise that creditors will accept reduced payments for debts and may offer relief regarding interest and other charges.

It remains to be seen whether this goodwill will continue if debtors must contribute a significant amount of their disposable income to a pension scheme under the auto-enrollment regulation.

First-time users of debt management plans may someday be expected to opt-out of pension schemes to maximize their debt repayments. If a debtor does not adhere to this creditor expectation, the consequences could be significant.

Creditors may also not look favourably upon a debtor who reduces debt management plan payments due to pension auto-enrolment. As the financial environment continues to change, both debtors and creditors may be affected.