Many people procrastinate about saving for their retirement, but as of 1st October 2015, when the government’s new auto-enrolment pension scheme got underway, we’re now obliged to at least consider the prospect.
Starting with the UK’s biggest firms (120,000 or more employees), the reforms will gradually be extended to all workplaces over the next five years or so, working their way down from the largest employers to the smallest. So far, feelings about the pensions plan seem to be mixed, with some debate over the extent to which the reforms will benefit Britain’s workers.
Image via Digital Sextant on Flickr
According to the plan, all employees in the country will automatically be enrolled in a pension scheme in their workplace – either their employer’s own existing pension plan, or one of the new schemes, such as the National Employment Savings Trust, which the government has put in place for employers without current provision.
Small steps
In order to ease everyone into the practice, contributions will begin at a very small level – just 0.8% of the employee’s own pensionable earnings, supplemented by a further 1% paid in by their employer and another 0.2% in tax relief.
Eventually, the goal is to see all workers paying in 4% of their salary to the pension pot, with employers contributing 3% and 1% in tax relief, for a total of 8% of each employee’s pensionable earnings. These contributions will be invested and then upon retirement, the employee can use the accumulated funds to purchase an annuity (or annual pension).
A helping hand
Currently only one in three workers in the private sector are signed up to a pension plan, a worrying statistic considering the extremely low level of income provided by the state pension in Britain. For this reason, many are inclined to view the auto-enrolment scheme as a good thing in that it encourages people to prioritise saving for their retirement.
By taking advantage of these workplace pension plans, workers also get to benefit from their employer’s contributions and the tax relief – both of which amount to “free money” going into their personal pension pot.
Ends might not meet
Other people are not so sure the reforms are enough to fix the situation. Many critics are concerned that the small amounts being paid in are not enough to provide a suitable pension, or that poor investment returns will harm the value of workers’ savings, but that people will fail to save in other ways because they incorrectly assume that these pension schemes will provide more than enough for their retirement.
There is also an option for workers to opt out of their employer’s pension plan, which many people in low-paid jobs (or industries such as hospitality, which tend to have a high staff turnover rate) may elect to do, fearing that they cannot afford to lose further deductions from their monthly wage.
What do you think about the new auto-enrolment pension scheme? Will it prove a good move for workers, or will its weaknesses outweigh any benefits?
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October 3, 2023
lifestyle, news