The introduction of auto-enrolment could transform the pensions landscape for millions of UK workers.
The government-backed pension scheme is being gradually phased in from October and will affect any employee aged over 22, who earns more than £8,105.
Auto-enrolment is designed to tackle the pensions crisis, to encourage individuals to save for their retirement in a straight-forward manner, in which employees take advantage of a mandatory pension scheme that small and medium-sized businesses will have to introduce over the next few years.
As well as getting more people to save for a pension, the system is designed to simplify the pensions process.
It will not be mandatory for individuals to join pension schemes run under the auto-enrolment umbrella. However, it is hoped that the contributions to an individual’s pension fund from both their employer and the government will encourage people to save.
Anyone, over 22, who earns more than the annual personal allowance, currently £8,105, and who has been employed for more than three months will automatically be enrolled in either their current employer’s occupational pension scheme or a qualifying alternative chosen by their employer.
Auto-enrolment will be introduced over five years. The biggest companies will start the process to allow very small employers more time to get ready for auto-enrolment.
There will be two sets of options for employers. For small companies that do not have the resources to set up their own scheme, the government has developed its own scheme called NEST. This scheme has an annual management charge of just 0.3 per cent, though investors have to pay a charge of 1.8 per cent on every contribution.
Alternatively, companies can opt for an alternative scheme run by not-for-profit People's Pension, which has an annual management charge of just 0.50 per cent and no charge for contributions, switching funds or transfers.
The amount of money put into auto-enrolment schemes will also be increased gradually so that it is not too much of a shock for employees and to discourage them from leaving the scheme.
Contributions will rise gradually over the first five years, but by 2018 the rules state that all employees must contribute at least four per cent of their earnings. If they do, then their employer will add a further three per cent and they will earn another one per cent from the government through tax relief.
Pensions Minister, Steve Webb predicts that about a third of people who become auto-enrolled will eventually opt out, but he thinks this will still vastly improve the finances of people in retirement in the future.
He said: "If we can get 7.5 million people in an employer contributory scheme, that will be incredible."