How will new 'auto-enrolment' pension rules affect you?
Phil Oakley Sep 21, 2012
According to the Department of Work and Pensions (DWP), 11 million of us aren’t saving enough for retirement. From this October, the government plans to try and make sure we do.
The scheme is called auto-enrolment. How will it work? If you’re aged over 22, pay income tax and are not a member of a company pension scheme, your firm will have to enrol you in one between now and 2018, depending largely on its size. Under auto-enrolment, initially 2% of your salary will have to be invested in a company pension scheme, of which your employer contributes 1%. After 2018, this will rise to 8% with an employer paying 3% of the total. The scheme is primarily aimed at low-paid workers who aren’t saving enough.
So will it crack the nation’s pension shortfall? Probably not. The problem with the scheme is that people don’t have to join it. They can opt out at any time. Lower-paid workers struggling with existing bills won’t welcome another deduction from their pay. Despite decent tax breaks, many will see no reason to save when current welfare benefits could pay them as much in retirement as when they were in work.
Besides, saving 8% of your salary is nowhere near enough to build a decent pension pot. Pensions advisers suggest even people who start saving in their 20s should save at least 15% of their salary and keep increasing the proportion as they get older. The only way to tackle Britain’s pension time bomb is to make saving compulsory and at higher rates. Auto-enrolment will do some good if it impresses on people the need to save. But it is not radical enough to deal with our huge pensions problem.
So what about the impact on companies? Most larger firms will already have a pension scheme that meets the requirements of auto-enrolment. The new rules should not be a problem for them. Indeed, some might be tempted to reduce their benefit in line with auto-enrolment guidelines to save money. Bigger issues arise for the two-thirds of employers who have less than five employees. Many of these firms don’t offer pensions and being forced to do so will impose extra costs and hassle.
Many smaller firms will look to the National Employment Savings Trust (NEST) to ensure they meet their obligations. NEST schemes should have low charges (a 0.3% annual fee) and will allocate an individual pension account to each employee for life.