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 440.

    6 Minutes ago
    "But low annuity rates mean you could take decades to get that money back after you retire - especially if you die soon after retirement, also you can't leave the money to your kids = bad."

    So look at income drawdown schemes then.

  • rate this

    Comment number 439.

    I think the system will be fair when MPs and civil servants (especially at the Bank of England) are prepared to sacrifice their brilliant final salary schemes and take up this amazing auto enrolment offer.
    My advice then is to use the fund the Bank of England employees have chosen,
    oh wait all their pension is invested in index-linked gilts...

  • rate this

    Comment number 438.

    The government has realised people are no longer setting aside money via pension schemes, the same pension schemes the government borrows from as an alternative to foreign loans. Increasing the amount of money being pumped into pension schemes allows the government to access more funds with the UK citizen as its lender.

    I just hope the money is still there come retirement.

  • rate this

    Comment number 437.

    426. Parallel World

    I totally agree they're confusing, took me years to learn what I know but I have left that industry now.

    Of course insurance companies will want to make a profit as a business but what most people don't realise is that it's a % of the returns on customers funds.

    There is lots of free info online, don't pay IFAs who from experience, sell you the policy with most commission!

  • rate this

    Comment number 436.

    1) Gordon Brown started raping pension funds years ago and that is why many are in deficit now.

    2) There should be a distinctly larger state pension reserved for people with full NI contributions. people that have never worked, or incomers should be pro-rated.

  • rate this

    Comment number 435.

    419.Delbhoy82 "Annuities pay an income until the day you die!"

    Which could be before you even get to receive your first payment...

  • rate this

    Comment number 434.

    For all those who think its a waste of time or not for them OPT OUT! Don't just accept what you are given, make a conscious choice of how to save for the future. If you'd rather blow it on heavily taxed booze and fags then do that. For all those who think you have to buy an annuity then Google "income drawdown" or look into SIPPS.

  • rate this

    Comment number 433.

    You've only considered half the argument. Tax relief and employer contributions = good
    But low annuity rates mean you could take decades to get that money back after you retire - especially if you die soon after retirement, also you can't leave the money to your kids = bad.

    "an income for life. Where else offers that!"

    Index linked gilts do...!

  • rate this

    Comment number 432.

    so...a person aged 20 pays into the scheme for the next 45plus years and expects a suitable pension at the end?..and in the meantime various wheeler dealers have cherrypicked and made a fortune out of the contributions leaving nothing in the pot..its a glorious scam to make money for a few companies with no comeback at the end of the day.How many pensions have gone missing in the past?

  • rate this

    Comment number 431.

    The main reason why public sector workers have reasonable pensions is .. because for 30+ Years they choose to pay in around 6% to 15% of their pre tax income into them.

    Yes, and this amounts to 15% of their pensions, the other 85% is harvested from tthe private sector in taxes, whose pensions brown stole at the same time, very fair!

  • rate this

    Comment number 430.

    "BTW - you contradict yourself on the gold argument"

    There is no contradiction. Gold market is influenced by many factors just like any other commodity, but -generally- remains stable over the long term. It will rise quite a bit in the near future as people jump ship from riskier markets - it's fast becoming the defacto world reserve currency.

  • rate this

    Comment number 429.

    I remain to be convinced that this scheme is the answer and suspect future governments will have to look at the issue again.

    What also concerns me is that there appears nothing to stop employers currently offering better schemes from defaulting to this scheme.

  • rate this

    Comment number 428.

    Privitisation of pension provision via the back door, watch out as we all get less for paying more. After all, other privitisations have been so successful have they not ? (said with a hint of sarcasm)

  • rate this

    Comment number 427.

    I used have a final salery pension until my company froze it after 32 years we now paying a pension where you get the money to buy a pension when you retire. they are a complete waste of time I would have to put in all my salary to get anything decent back don't be conned into thinking these pensions are any good

  • rate this

    Comment number 426.

    419. Delbhoy82
    411 - It's not quite that simple.
    You make my point better than I do :o)
    Pensions are over-engineered, skewed to the financial services industry. If you want 'impartial advice' you have to pay five grand for it, to a person from the financial services industry.
    I have spent the last two years unravelling the small print on my several pensions, by the way

  • rate this

    Comment number 425.

    So i retire at 66, i am 58 now. Which will taken on by my employer reluctantly at the last moment, in 2014. So a reduction in any pay rise i might have expected from my employer to meet the cost. So payments for 6 years. How is this not a complete and utter waste of time !!!!!!!!!!

  • rate this

    Comment number 424.

    avoid the pension funds, do it yourself

    You're not living in the real world if you think diversifying across multiple sectors can be done easily or cheaply by an individual. You have to pay commission, pay to keep your investments in safe custody etc. If it was that easy then everyone would do it.

    BTW - you contradict yourself on the gold argument.

  • rate this

    Comment number 423.

    I REPEAT!!! 96.ichabod

    Rubbish. A teacher retiring at 68 with a life expectancy of 71. They pay 9% of their salary for 47 years to get it. Govt wins!!!

    They'd be better sticking it under the mattress. I'm not even a teacher and I'm fed up listening to you idiots going on about what a cushy life they have.

    I hate my own kids sometimes so god knows what its like to deal with others

  • rate this

    Comment number 422.

    Its just another deduction same as tax and national insurance, so starting a new job you wont notice it out your monthly wage. In all honesty you are better paying the money to your mortgage. 46 grand from 22 to 62 is ridiculous, when you consider a mortgage is on average 3 times that over 25-30 years. How many folk starting out think this money will be here for them when retirement age comes?

  • rate this

    Comment number 421.

    $1m of gold in 92 is worth $9m now."

    $1m of gold in 1980 is worth $1.8m now, not even kept up with inflation. Whereas $1m in a house in 1980 or in FTSE 100 companies would both be considerably more valuable.


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