From today, automatic enrollment into a workplace pension will affect millions of people. For many workers their employer will be contributing to their pension savings for the first time thanks to plans introduced by the Coaltion Government.
Under the new scheme workers who are over 22 years old and not already a part of a workplace pension scheme will have initially 0.8% of their paypacket automatically diverted into a pension pot, and their employer will by law be required to add the equivalent of 1% of the employee’s earnings to the pot. Tax relief will take the total contribution to 2%.
Most workers aged between 22 and the state pension age who are earning at least £8,105 a year will contribute to the new workplace pension funds which will be managed by insurance companies or a government-backed seheme such as the National Employment Savings Trust.
Only the largest employers, such as the big supermarkets, will be involved in the first wave of automatic enrollment, and others will join the system as it is rolled out. Small firms will not sign up their staff until June 2015 at the earliest.
Automatic enrolment is vital as workers should not rely solely on the state pension when they retire, especially as life expectancy increases, and it 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 before they start to see funds being diverted from their pay packet.
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.