Auto-enrolment officially starts today - but are you ready?

The Momentum UK Team 01 October 2012

Today marks the first day of the first stage of pension reforms scheme that will see millions of workers automatically entered into saving for their retirement through their workplace.

Auto-enrolment marks a radical change to the company pension schemes in the UK whereby employees are entered into a ‘top-up’ pension savings system aa a percentage of their own salary is met by a contribution from their employer, to build a nest-egg for their retirement.

The purpose of automatic enrolment is to provide a uniform method of saving for a pension which is accessible to everyone to help combat the issue of lacking retirement provisions and drive the notion of ‘saving for tomorrow’.

Steve Webb, Pension Minister said:

“The huge gap that we are trying to fill is 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.”

Auto-enrolment explained

Despite its simplicity being one of the key selling points of the scheme, reports have highlighted that many people are still unsure of how or whether auto-enrolment will affect them.

Eligible workers aged between 22 and state pension age who are not already part of a company pension scheme will automatically be enrolled from today.

The first wave of enrolments will be for workers of the largest employers such as the big supermarkets. The scheme will then be phased out in stages with some of the smaller firms not required to sign up their workforce until June 2015 at the earliest.

Contributions will be payable on earnings between £5,564 and £42,475. In the initial stages, the amount that will be diverted from workers’ salaries into a pension pot will be small at a minimum of 0.8%. Employers are legally obliged to contribute additional 1% of their employees’ earnings with tax relief offering a further 0.2%.

In time, the amount being saved will grow to equal 8% with 4% being put in by the employee, 3% from the employer and 1% of tax relief.

If a 22 year old worker on a £20,000 salary saved when the 8% rate comes into effect for a further 40 years their contributions at the age of 62 could equal around £46,160, according to Money Advice Service. With an average of a 4% a year return over time, they could see a pension pot of £112,107 which at the current annuity rates would offer an retirement income of £3,441 a year.

While all workers have the choice of opting out of auto-enrolment, the government have encouraged workers to carefully consider the benefits of the scheme before doing so, urging them not to fall into the trap of sole reliance on the state pension especially as life expectancy increases.

Steve Gay of the Association of British Insurers (ABI) said:

“It cannot be stressed enough how important it is to save for retirement. 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."