The words “auto-enrolment pension” might make your eyes glaze over but ignore them at your peril: employees could be giving up £6,000 in “free money” towards their pension over the next decade if they opt out of auto-enrolment, according to some number-crunching by Fidelity Worldwide Investment.
The scheme, which started this week, sees millions of workers pay into a new, long-term pension scheme designed to work alongside both the state pension and any private pension saving. As pensions minister Steve Webb put it: “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.”
The scheme means companies choose pension plans on behalf of their employees: the firms make a contribution as well as the employee.
A portion of the pay packets of all workers over 22, who are not already part of a workplace pension plan, and are earning at least £8,105 a year will then automatically be put into a pension pot. Up to 11 million people will be involved over the coming years: the scheme is taking place in tranches, with people working for companies with a head count of more than 120,000 employees involved first. By May 2014 it will include companies with 90 staff, and all employers should have auto-enrolled staff by 2017.
It could make a sizeable difference to retirement: according to Fidelity, someone on the UK’s median salary of £26,200 who is enrolled in the pension scheme on 1st October 2012 would receive some £6,000 in employer contributions and Government tax relief in their pension pot if they stay enrolled for 10 years.
Workers can choose to opt out of the scheme - you just need to tell whoever runs the pension scheme at your workplace. But in the future, relying on the basic state pension (currently £107.45 a week for a single person) could mean living in poverty. Plus, by staying in the scheme, your firm will also contribute a minimum of one per cent towards your retirement (rising to at least three per cent in the future). There are tax-breaks too: the money you put towards your pension won’t be liable for income tax.