Pensions: Auto-enrolment begins today for biggest firms

The new UK pensions system, auto-enrolment begins today and it aims to encourage millions of employees to save for their retirement.

The aim of the new system is to try and incentivize low and medium earning employees to save additional funds for their pension provision on top of the state pension.

Employees will be encouraged because if the save their employers will contribute additional money to their pension and the government will also add some funds to their pension pot through pensions tax relief.

The pension employees save for through auto-enrolment is designed to complement their state pension and any private pension they may also have.

Under the new auto-enrolment scheme any worker over the age of 22 and earning above the current personal tax-free allowance of £8,105 a year can opt in for auto-enrolment and they will pay in a minimum of 0.8 per cent of their earnings, above £5,564.

Their employer will then add a further one per cent and tax relief will provide an additional 0.2 per cent to take the total going into an employees’ pension pot of two per cent. Any earnings above £42,475 will be exempt from contributing to the scheme.

These limits are the minimum amounts and they will eventually rise to a four per cent employee contribution, a three per cent employers’ contribution and a further one per cent in tax relief taking the total to eight per cent.

The funds can be invested in either an existing company pension, a scheme run by an insurance company or through the government-backed National Employment Savings Trust (NEST). On retirement the funds can be accessed to purchase an annuity.

The government has set up auto-enrolment to encourage people to save more for their retirement because people are living longer and have to fund a longer retirement period.

Pensions Minister Steve Webb said: "The huge gap that we are trying to fill is in 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."

The Department for Work and Pensions says it expects 4.3 million people to be signed up for the scheme by May 2014.

Initially, just the largest employers have to run an auto-enrolment scheme but smaller firms will be required to run one as time goes by.

From October 1st, companies with more than 120,000 employees have to run a scheme. By the end of 2013, all firms with more than 500 employees will have to run a scheme, until finally firms with fewer than 58 employees will have to run an auto-enrolment scheme, to be set up in stages from February 2015 to February 2018.

Joanne Segars, chief executive of the National Association of Pension Funds (NAPF) said: "Some people might think about quitting their new pension, but we urge them to stick with it and get saving for their old age.

"Leaving the pension would mean losing tax breaks and employer contributions which are, in effect, free money."

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