Pensions auto-enrolment attracts cautious welcome


Kerry Lightfoot, Morrisons employee: "It will be peace of mind that there will be something there at retirement"

A huge reform in pension provision for millions of low and middle earners has been given a cautious welcome by trade unions, employers and charities.

Staff at the UK's biggest firms have started to be automatically enrolled in a workplace pension, which both they and their employers will pay into.

The TUC said it was the beginning of a "pensions new deal".

But others warned that it could lead to people still not saving enough for their retirement.

It is designed to supplement the current state pension and to stem the drastic decline in workers' pension provision.

"Too many employers have walked away from their responsibilities, and now just one in three private sector workers are in a pension, threatening many with a miserable retirement," said general secretary Brendan Barber.

"Of course it can and should be made better, but we now have what should be a stable framework," he said.

Pensions Minister Steve Webb said the new system, considered the biggest change to saving for retirement for over a century, should work because it was so simple.

"You don't have all the hassle and complexity of choosing a pension. The firm chooses it for you, they put money in, you put money in, and then the only hassle is if you want to opt out," Mr Webb added.

How it works

Staff will either join their existing employer's scheme, or one of the new group schemes that employers can adopt, such as the National Employment Savings Trust (Nest).

Auto-enrolment criteria

  • Workers not already in a company pension scheme will be enrolled if they are aged between 22 and the state pension age
  • However, these workers must be earning at least £8,105 a year
  • The contribution they, and their employers, make will be based on their wage, although the first £5,564 a year they earn will not be taken into account
  • Any earnings above £42,475 will also be ignored in the contribution calculation
  • So the amount between £5,564 and £42,475 is known as their pensionable pay
  • Staff can opt out

The process of recruitment started with the biggest employers on 1 October 2012 and will then be staggered over the next few years until 2018. The smallest employers begin auto-enrolment for their staff in January 2015.

At the same time, contribution levels will rise slowly, to avoid giving either staff or their firms an unwelcome financial jolt while the economy is still in recession.

Contributions will start with staff paying in a minimum of just 0.8% of their pensionable earnings.

On top of that employers will have to pay in 1% of their employees' pensionable earnings, with tax relief contributing another 0.2%.

These contribution levels will eventually rise to 4% from the employee, 3% from their employer and 1% in tax relief, giving a total of 8%.

The contributions will be invested and then when the employee retires, currently at 55 at the earliest, they will have to buy an annual pension, or annuity, with their accumulated pot.

The employers' organisation, the CBI, praised the design of the scheme.

"The change is rightly being phased over many years, to ensure it remains affordable for businesses in these tough times," said director general John Cridland.

How much pension?

Critics, however, have suggested that this grand plan could lead to many people generating very small pensions.

Workplace pension graph

That may be because they will pay in only small sums during their working lifetimes, or because the investments will be at the mercy of financial markets, which may provide poor returns.

When the full 8% contribution rate is in effect, someone earning £20,000 a year would see £1,154.88 in combined contributions being added to their pot each year.

If they were aged 22, and then saved for 40 years before retiring at the age of 62, these contributions would eventually total £46,160.

If, over those 40 years, there was an average 3% a year return on the funds in which the contributions were invested, then the retiree would end up with a pot of £88,488.

According to the Money Advice Service, at the current historically low annuity rates this would provide a man in good health with an inflation linked annual pension of as much as £2,714 a year, or £226 a month.

Michelle Mitchell of Age UK said the government now needed to press ahead with plans for an underlying flat-rate state pension.

"We believe this would prevent people worrying about jeopardising means tested benefits if they are auto-enrolled and would give a clearer idea of how much money a person can expect when they retire," she said.

"We want to see the current contribution and transfer restrictions on Nest, the government savings scheme, lifted, so people can accumulate their savings in one place and eventually convert them into a good value annuity."

Opting out

Auto-enrolment timetable

  • October 2012: Firms with 120,000 employees or more
  • November 2012: 50,000 to 119,999 employees
  • January 2013: 30,000 to 49,999 employees
  • February 2013: 20,000 to 29,999 employees
  • March 2013: 10,000 to 19,999 employees
  • April 2013: 6,000 to 9,999 employees
  • May 2013: 4,100 to 5,999 employees
  • June 2013: 4,000 to 4,099 employees
  • July 2013: 3,000 to 3,999 employees
  • August 2013: 2,000 to 2,999 employees
  • September 2013: 1,250 to 1,999 employees
  • October 2013: 800 to 1,249 employees
  • November 2013: 500 to 799 employees
  • From January 2014: Firms with fewer than 500 employees in stages
  • From January 2015: Firms with fewer than 58 employees in stages
  • February 2018: Timetable completed

Source: The Pensions Regulator

Workers will have the option to opt out of the pension savings scheme, and will be given details of how to do this before they start to see their contributions being diverted from their pay packet.

"Some people might think about quitting their new pension, but we urge them to stick with it and get saving for their old age," said Joanne Segars, chief executive of the National Association of Pension Funds (NAPF).

"Leaving the pension would mean losing tax breaks and employer contributions which are, in effect, free money."

The Department for Work and Pensions said that, by the end of the year, about 600,000 more people in the UK would be saving into a workplace pension and by May 2014 about 4.3 million people would be signed up.

The eventual aim is to increase that figure to between six and nine million people by the end of the 2018, by when automatic enrolment will cover all employers.

Pension provision in the private sector has been in drastic decline in the past two decades, with fewer than three million private sector workers now paying into a company pension scheme.

In some cases employers simply do not provide any pension scheme for their staff at all.

In other cases staff do not join existing schemes, typically because they are low paid and fear they cannot afford to contribute, or because they work in industries such as catering where there is a high turnover of staff who stay in jobs for only short periods of time.

The concept of automatically recruiting staff to pension schemes - but with the possibility of staff then opting out - was first suggested by Lord Turner's Pension Commission in 2005.


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  • rate this

    Comment number 300.

    Feeding the family and heating the house in Winter comes before paying 1% into a penion fund that will not keep up with the 10%+ inflation masked by Government lies.

    A pensions advisor friend once told me not to bother with a pension and buy property. Unfortuanley not had the money for the latter and now being made to do the former.

  • rate this

    Comment number 299.

    The only way to get a fair pension would be if MP's joined the same pension scheme. What will £287.00 a wk be worth or buy in 40 or 50 yrs?

  • rate this

    Comment number 298.

    If the government wants me to save more for my pension maybe my employer (the government) should pay me more. I can't put away more than I earn.

  • rate this

    Comment number 297.

    Everyone needs to take responsibility for themselves and their financial future.... I think that once everyone gets used to saving rather than spending, they will realise that it's not so bad.

    And I think you fail utterly to appreciate the position people are in, their basic natures and the ulterior motices of the govt.
    What peoplpe will realise is that they were duped.

  • rate this

    Comment number 296.

    Banks are too big too fail; at the same time, there are too many people whose retirement depend a lot on the government provision.
    How did we get to this stage? Years of bad government decisions. The government need to hand rights and more importantly, responsibilities back to its people and let them fail.
    Let's hope this is a good start.

  • rate this

    Comment number 295.

    Give back my 28 years NI Pension contributions with interenst and i will invest somewhere other than a pension. Private Pensions are a worthless investment!!"

    Sorry, on several fronts that is not something that can be described as a credible or implementable strategy. You will have to be content with taxpayer handouts, such as they are, in retirement then.

  • rate this

    Comment number 294.

    @ 278.farkyss
    Until they change the rules of this new scheme, I have an opt-out option, which I'll be exercising.
    My current employer has confirmed this won't arise until 2014 (present rules & rollout).
    Waiting for the Gov't announcement on changes to the rules when they see the level of opt-out...

  • rate this

    Comment number 293.

    @248 - you conveniently ommitted the part of my comment that covered the loss of my £35K SIPP contributions
    What part was that - you didn't mention any 35K loss in @213 ?
    I don't know your circumstances but you're normally advised to diversify to stop this sort of thing happening. You can lose in ANY investment if badly advised or unlucky.

  • rate this

    Comment number 292.

    281 Connor. It's pointless looking back 50 or 20 years. Those days are gone for good. You might get 5% above inflation if you are lucky, less 1% for the fund manager, back down to the 4% in the article's illustration.

  • rate this

    Comment number 291.

    The payments made to people on average or low wages will probably get them a pension of £4 or £5 a week. And this will be subtracted pound for pount from pension credit, which they would be entitled to anyway.

    Few people seem to understand how much you need to put in to a pension to get anything worthwhile out of it.

  • rate this

    Comment number 290.

    The world needs to do more to prepare for the impact of a rapidly ageing population, the UN has warned - particularly in developing countries

    Looks like the UN's Agenda 21 is going like clock work with this Pension hike!

  • rate this

    Comment number 289.

    Beware of this new scheme as it is not new and can damage your income. I paid into such a scheme for 18 years with my employer also paying into it. When he died we found out he had not contributed to the scheme at all - he had built up his business with our cash and we were left high and dry - so beware.

  • rate this

    Comment number 288.

    267. alexicon
    However, in the state scheme money is put aside from income, into a scheme, that guarantees income for your retirement years. Putting money aside, is by definition saving it."

    This is totally wrong. The incoming money is immediately spent on existing pensions. No money is 'put aside'. If NI stopped tomorrow, you'd have no state pension, even if you had "paid in" for 40 years.

  • rate this

    Comment number 287.

    So are Banks, Corporations and Big Business going to see changes to their obligations of actually paying dividends in to the pension pots that fund them?


    This is the latest big public rip-off by those in power and your pension fund performance against the pension Managment fees and poor dividend payouts should tell you this in coming years.

  • rate this

    Comment number 286.

    My main worry is that companys that get into financial difficulties may dip into the pension pot as has happened in the past so at the time when they payouts become due there expected pension no longer exists or are badly reduced.
    Safe guards must be put into place before this scheme comes into place.

  • rate this

    Comment number 285.

    269.Trout Mask Replica
    3 Minutes ago
    266. UKStinks

    And your alternative strategy to provide yourself with a reasonable and reliable income in old age to keep you in the manner to which you aspire is what exactly?
    Give back my 28 years NI Pension contributions with interenst and i will invest somewhere other than a pension. Private Pensions are a worthless investment!!

  • rate this

    Comment number 284.

    Are we not paying into an old age pension scheme now, why not sort out OAP one, if people need to pay more in then so be it. But how much money do these private pension firms "rake off" the values of pensions for themselves the Government going to ensure people don't get "ripped off" with shares investments etc To much of a gamble at the moment, stick it under the bed till a better day ...

  • rate this

    Comment number 283.

    So we live in a democracy where iam told i have to now pay 1% of my salary into a compulsory pension? How does that work?

    Well it works because the lib dems fooled the electorate and let in an unwanted tory govt, with an ideological agenda.
    We failed as an electorate to pay proper attention to the stuation. Let's hope we all learn to avoid this mistake next time.

  • rate this

    Comment number 282.

    So if you save £100 a month for 40 years, you might get £287 a month pension for 20 years, if you live long enough. That's with interest rates 4% more than inflation for all of those 40 years, which at the moment looks optimistic. Hardly exciting. The whole pension thing needs re working from scratch, especially the annuity angle.

  • rate this

    Comment number 281.


    Your comment is wrong on every level...

    An annual study by Barclays bank found that over 20 years to the end of last year, UK shares produced annual returns after inflation of 6.7%. This is better than government bonds - at 6.2% and far superior to cash at 3.9%. Over 50 years, shares have grown in value at 7% cent a year, compared with only 2% for cash and 2.3% for gilts.


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