In October this year one of the biggest shake-ups to the pension system for decades will begin. But are we ready for it? And how can we encourage people to put aside more for their future?
Acknowledging that the state pension is too low to sustain most people in a comfortable retirement, the government has adopted a policy of ‘auto-enrolment’, where employees who don’t already belong to a workplace scheme will be automatically signed up to one.
In a country where only half the workforce currently belongs to a pension scheme, this has the potential to transform the pension landscape and deliver a better standard of living in old age.
What is auto-enrolment?
Starting with large firms first, then taking in medium and small employers, everyone over the age of 22 earning more than £8,105 a year will eventually be signed up. If their employer doesn’t have a suitable scheme they can join the newly formed National Employment Savings Trust (NEST).
Employers and employees are both required to make a minimum contribution, which will initially be 1% from the employer, 1% from the employee with a further top up coming from HMRC in the form of tax relief. When automatic enrolment is fully implemented in 2018, the total contribution should come to at least 8% (3% employer, 4% employee and 1% HMRC).
Even this might not be enough to guarantee a comfortable retirement. Newly enrolled staff will be saving into a defined contribution scheme, building up a pension pot with which to buy an annuity. At the moment, it takes £100,000 to guarantee £6,000 a year.
Starting young is clearly a good idea, but topping up with extra contributions would also help (if you can afford it). Enlightened employers already contribute more than the minimum, helping their workforce to put money aside for a meaningful pension. More need to do the same.
Getting workplace pensions right
Low-cost schemes like NEST and a sense of pension ownership should help those who are auto-enrolled stay the course. The risk is that too many simply decide that saving isn’t worthwhile and ‘opt out’. This is the challenge we face. Automatic enrolment should be good news for millions of people, but companies must select good-value schemes to ensure that it delivers for their staff.
What do you think about auto-enrolment pensions? What would make you opt out and what would convince you to stay in? Do you trust your employer to select a good value pension scheme, or is NEST the only worthwhile option?