Pensions Minister Steve Webb has led a “truly historic change” this month – but few in Gloucestershire or elsewhere have yet realised its impact.
On October 1, the Government changed the rules so that eventually all employees earning £156 a week or more will pay into a workplace pension scheme unless they specifically opt out.
You might not want money taken out of the pay you take home, but the cash will be needed to fund your retirement.
And if you opt out, you are in effect turning down “free” money in the form of the employer contributions and tax relief that will increase the size of the pension pot.
Mr Webb, Lib Dem MP for Thornbury and Yate, said that by Christmas more than half a million people would be saving in a workplace pension scheme for the first time.
"From this month, we will start seeing large firms, such as banks and big supermarkets, automatically enrolling their staff into a workplace pension. Between now and 2018, more and more employers will come on stream – right down to the smallest ones.
"If we can get between six and nine million more people saving in a pension by the time all employers are in, that’s a genuine savings revolution."
The Government's biggest battle is making both employers and employees aware of the changes.
A high-profile advertising campaign fronted by celebrity bosses such as businesswoman Karren Brady has been launched but surveys show the majority of people are still in the dark.
The change is needed because more people are living longer yet fewer people are saving into company pensions.
In the past 25 years, life expectancy at age 65 has increased by 5 years for men and 3 years for women.
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.
In the South West, the proportion saving into workplace pensions dropped from 55 per cent in 1997 to 41 per cent last year.
Across the country, fewer than three million private sector workers put money into schemes, compared with more than eight million in the 1960s.
Joanne Segars, chief executive of the National Association of Pension Funds (NAPF), said: "The UK is drifting towards an iceberg when it comes to paying for its old age pensioners, and we need radical reform like this."
The Government says its AE programme will eventually result in 11 million more people starting to save for their old age.
It hopes that by placing eligible people in schemes unless they opt out, many will start to put money away almost by default.
Some will say that in straitened times they cannot afford to pay into a pension but experts say it would be foolish not to take advantage of the scheme.
Financial advisers caution, however, that people who want a comfortable old age should not rely solely on the AE pension, but should look at other forms of saving.
Gerry Dupree and Company, based in Stonehouse, has a useful guide on its website to the changes and what they mean for employers and employees.
Tom McPhail, of Hargreaves Lansdown in Bristol, said auto-enrolment represented the biggest revolution in pensions for at least a generation, arguably since the introduction of the state pension by Lloyd George in 1908.
“The key benefit of the AE rules for individuals is that they'll instantly double their money thanks to the tax relief and their employer's contribution. For every £4 the member invests, they'll get £8 in their pension,” he said.
Mr McPhail said the move to auto-enrolment was an essential step towards reinvigorating the UK's long-term savings.
“With the population ageing, life expectancy increasing, and the state digging itself deeper into debt every day, self-provision in the form of private pension savings represents the best hope of a decent retirement income for millions,” he said.
But he warned that the default eight per cent contribution rate was not enough to build up a good pension income.
“For most people a contribution rate of 12 per cent would be a better starting point,” he said,
“The best advice is to go online and use a pension calculator to work out how much they need to save in order to be able to retire when they want. It is also worth revisiting this calculation at regular intervals right through your working life.”
Patrick Connolly, of AWD Chase de Vere in Bath, said: “We strongly encourage people to participate in auto-enrolment and to build up their own pension savings. It is far better they save something rather than nothing at all.
“However, while auto-enrolment could provide a foundation for people’s retirement planning, it is unlikely to give them the standard of living they would want in retirement.
Individuals should therefore do more than simply contribute the minimum amounts into an AE pension. To help generate enough income in retirement they must also look to make additional pension contributions and to invest regularly in cash and/or stocks and shares ISAs.”
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.