What is auto-enrolment?
It's not hard to see why the numbers of people saving into workplace pensions has dropped below three million.
The Maxwell scandal and others, poor investment returns and falling interest rates have hit confidence in saving for retirement over recent decades.
And with pressures on family budgets because of the ever-rising cost of living, people are reluctant to surrender any of their pay packet for a dubious future benefit.
Only 40 per cent of private-sector workers in the East Midlands put money in a workplace pension, compared with 51 per cent in 1997 and the pattern is repeated across the country.
But at the same time increased life expectancy means there is more need than even to put money away for old age.
In 1901 there were 10 people working for every pensioner in the UK. In 2010 there were three people working for every pensioner. By 2050 it is expected this will fall to two workers.
That's why the Government has launched what is heralded as the biggest change to pensions since Lloyd George introduced the state pension in 1908.
Auto-enrolment, which began this month, aims to get up to 11 million more people saving into a pension for the first time.
Workers who earn more than £156 a week will be enrolled automatically into their employer's pension scheme unless they actively opt out.
The aim is to use the natural apathy that has kept some people from investing in pensions in the past to keep them saving.
The Government believes most people will not get round to opting out.
Those that consider it will be warned that they are in effect turning down “free” money in the form of employer contributions and tax relief that would be added to their pot.
Scott Gallacher, director of Leicester independent financial advisers Rowley Turton, said that although people might grumble about the short-term costs and interference from the nanny state, most would be better off with auto-enrolment.
However, he advised anyone with an existing pension plan to seek advice before stopping their contributions.
He also urged employers, especially smaller businesses, to get guidance on the new rules as they are very complex and the penalties for breaching them are large fines or even jail.
In common with most experts, he said that the Government's scheme alone would not be enough to fund a comfortable retirement and people should look at other forms of saving such as ISAs and investments.
Auto-enrolment is being rolled out from October 1 this year with smaller firms joining over the next six years.
Pensions Minister Steve Webb said: “Automatic enrolment is the biggest boost to pensions for over a century. By the time all employers are included, millions more people will be saving for their old age, with over half a million new savers in workplace pensions by Christmas.
"Few policies affect as many people and this will be a truly radical social change. All the international evidence shows people respond positively to automatic enrolment, and I’m determined to make sure that pensions are no longer seen as the preserve of the few."
Here, we take a look at 10 of the most pressing questions about auto-enrolment and how and when it could affect you.
1. What is auto-enrolment?
Auto-enrolment makes it a legal requirement for companies automatically to enrol their employees (both current and new) into a workplace pension. As things stand, if your company offers a pension scheme and you want to join it, you will have to actively sign up. But under auto-enrolment, employees will be automatically signed up and will have to actively opt out instead.
2. When does it start?
Officially auto-enrolment began on October 1. It will be implemented as a gradual roll-out over the next six years – and the date it will specifically affect you will depend on the size of the company you work for.
The first phase will apply to large companies employing more than 120,000 people – although there are provisions for a three-month delay to this start. Smaller companies are unlikely to undergo the changes until 2017.
When your workplace begins auto-enrolment, you'll know. You will be sent a letter with an explanation of the new pension scheme, how much will be paid into it, and what date it will start.
3. Will everyone be affected?
No. To be automatically enrolled in your company pension scheme the criteria are as follows:
- You are at least 22 years old
- You are below state pension age
- You earn more than £8,105 a year
- You are not already part of a company pension scheme
- You work in the UK
However, even if you do not fit these criteria, you still have the right to join your company's pension scheme if you make the request – and your employer must agree.
4. How much of my salary will I have to contribute?
Workers will have to pay in 1 per cent of their gross annual income, with employers contributing another 1 per cent. However, from October 2018, the total amount contributed will have risen to 8 per cent of gross monthly pay, of which the employer pays 3 per cent and the employee 5 per cent Employees can choose to pay more than this however.
5. What pension options will be available?
There are two main types of workplace pensions – a defined benefit scheme and a defined contribution scheme – the latter of which is the most common.
With a defined contribution scheme, the money paid into your pension pot will be distributed across various investments, such as shares.
Over time, these are expected to give a better return than savings accounts, although along the way may experience dips.
With a defined benefit scheme, the amount you will receive when you do retire will depend on factors such as how long you have had the pension for and also on your earnings – for example a 'final salary' scheme.
6. Are my returns guaranteed?
No. As previously mentioned, as you are at the mercy of the stock market, the value of your pension may fall as well as rise. But one of the reasons that people are encouraged to start saving into a pension as early as possible is because it gives longer for the value of your investment to grow and ride out stock market volatility.
7. What happens if I move jobs?
Another aim of auto-enrolment is to make it simple for employees to transfer their pension if they move to a new company through a 'pot follows member' system. Options to make this as easy as possible are still under discussion.
8. I don't want a pension – how do I opt out?
You are entitled to opt out of the pension scheme. However, every three years your employer will automatically sign you up again and you will have to repeat the process.
You can choose at any point to leave the pension scheme. If you do this within a stated period, you will be refunded any money that you paid in. But once this period has elapsed, the money won't be refunded and will remain in your pension pot.
9. I own a very small business – what are my options?
Legally, even if you only employ one person (and they earn over the threshold) you will have to offer them a pension. However, as the roll-out is starting with the biggest companies' first, private individuals won't be affected until April 2017.
One option could be to use the newly created National Employment Savings Trust (NEST.) This not-for-profit organisation set up by the government offers a way for smaller employers to meet their obligations.
10. Are there any downsides to auto-enrolment?
Even if your pension pot has performed well over the years, this could result in you losing some means-tested benefits later on. But a pension is likely to be a better option than relying on state funds years down the line anyway.