1 October 2012
Last updated at 15:57 GMT
Radical reform of pensions begins
Automatic enrolment into a workplace pension comes into effect -
heralded as a radical change - but the impact on savings remains
unclear, economists say.
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Pensions auto-enrolment starts for biggest firms
Kerry Lightfoot, an employee of Morrisons in Redcar: "It will be peace of mind that there will be something there at retirement"
A radical reform of UK workplace pensions is under way but the overall effect on savings remains unclear, economists have said.
Automatic enrolment into a workplace pension, which starts for some on Monday, will affect millions of people. The aim is to ensure that low and middle earners are provided with an addition to the state pension.
However, the Institute for Fiscal Studies says some who might have saved more may stick to the minimum level.
For many workers, this will be the first time their employer has contributed to their pension savings.
The pension employees derive from automatic enrolment is designed to complement both the state pension and any private pension saving.
Pensions Minister Steve Webb said: "The huge gap that we are trying to fill is [in] long-term pension saving."
"We have got half the workforce building up no pension beyond the state pension, and that is why this system is such a positive thing.
"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," he told the BBC.
Investment Under the new scheme, a slice of a worker's pay packet will automatically be diverted to a pension pot, assuming they are aged over 22 and not already part of a workplace pension scheme.
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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
At first this will only amount to a minimum of 0.8% of their pensionable earnings.
Their employer will, by law, be obliged to add the equivalent
of 1% of their employee's earnings to the pot. Tax relief adds another
0.2%.Eventually, these minimum contributions will rise to 4% from the employee, 3% from their employer and 1% in tax relief: a total of 8%.
These funds will be invested in either a company's existing workplace pension scheme, by a scheme run by an insurance company, or by a government-backed scheme, such as the National Employment Savings Trust (Nest).
At retirement, usually at the age of 55 at the earliest, the employee can access the funds to buy an annuity - an annual pension income for retirement.
Only the largest employers, such as the big supermarkets, will be involved in the first wave of automatic enrolment. Others will then join as the system is rolled out.
The smallest firms will not sign up their staff until June 2015 at the earliest.
How much pension?
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, over those 40 years, there was an average 4% a year return on the funds in which the contributions were invested, then the retiree would end up with a pot of £112,107.
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 £3,441 year, or £287 a month.
Optingout
The government says that automatic enrolment is vital as workers should not rely solely on the state pension when they retire, especially as life expectancy increases.
The policy has been welcomed by a number of campaigners and the insurance industry.
"It cannot be stressed enough how important it is to save for retirement," said Stephen Gay, of the Association of British Insurers (ABI).
"Automatic enrolment will help workers start a savings habit that will stay with them for a lifetime. The state pension is a foundation, but most people need more and the earlier people start to save, the easier they will find it to build enough savings for their later life."
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.
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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
"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."Savings substitution? The new system is likely to increase pension saving. Last year, only one in three private sector employees were signed up to a scheme.
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.
However, the Institute of Fiscal Studies (IFS) suggested that the effect on overall saving was unclear.
Some people who might have saved more into a pension might now stick to the minimum contribution level. Others might reduce other forms of saving, or decide not to run down existing debts, the IFS said.
Some employers might choose to fund their contributions by lowering pay rises, charging higher prices, or taking a cut in profits. All these might have the effect of cutting saving by households.
"Simply getting more people to save in a pension will not achieve the government's overall objectives if it is also accompanied by a reduction in the amounts saved into pensions or saved in other forms," said an IFS report.
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