Auto-enrolment - what will it mean for you?
Changes to pension rules were introduced in October 2012, which will see individuals automatically enrolled into a workplace pension by their employer - as opposed to opting into a pension as is the case at the moment.
The aim of the auto-enrolment scheme is to encourage us all to save for retirement. With people living longer, the burden of the state pension is increasing and the government wants to encourage individuals to do more about saving for their own retirement.
Auto-enrolment could be a good way of getting more people to join a company pension scheme, but it won't benefit everyone - many low earners will be excluded, and those who do earn enough to be enrolled automatically into a pension could end up with less take-home pay.
Here, we explain what is happening and what auto-enrolment could mean for you...
When is auto-enrolment starting?
The scheme began on 1 October 2012, but individual employers' duties are going to be introduced gradually over the next five years, and will be based on the size of the company.
You can choose to opt out of the scheme if you want to. If you decide not to join, employers have to repeat the process of signing you up and then giving you the opportunity to opt out every three years.
I only work part-time. Will I still have to be enrolled?
If you are at least 22 years old and earn more than £8,105 a year then your employer will have to automatically enrol you, although you can decide to opt out.
Some critics claim the government's decision to link the auto-enrolment threshold to the PAYE tax threshold is bad news for the low paid, most of whom are women working part-time, as they will be excluded.
Analysis of official statistics by the TUC found that 865,000 women earn between £5,564 and £7,605 (last year's National Insurance primary threshold), while a further million women earned between £7,605 and £10,000.
Low earners are entitled to opt in to the scheme, but do not have to.
How much do I have to contribute?
Employees will have to pay in 1% of their annual income, including tax relief, with employers contributing another 1%.
By October 2018, the total amount contributed will have risen to 8%, of which the employer pays 3%, the employee 4% and the government a further 1% in tax relief.
Are returns guaranteed?
No. Pensions are at the mercy of the stock market, so their value can fall as well as rise.
As a result, during periods when stock market returns are far from steady, many employees putting money aside for their old age may well find that their retirement income falls short of what they had hoped for.
However, while there is risk associated with investments linked to the stock market, over the long term shares tend to perform better than cash, so the hope is that you will end up with more than you would have done if you'd just put money in a standard savings account.
This is one of the reasons why people are encouraged to start saving into a pension as early as possible because it gives longer for the value of your investment to grow and ride out stock market volatility.
Another potential problem with pensions is that, unlike other forms of savings such as ISAs, your money is tied up until you retire, even if you find you urgently need the money in a few years' time, perhaps because you are taking maternity leave or become ill.
In addition, if you have built up a pension pot it may result in you losing out on some means-tested benefits later on, so you might have been better off either spending the money or holding it in an account that you could access easily.
On the flipside, the fact you can't access the money in your pension could be a good thing because for many people the temptation to dip into their long-term savings could be too great and leave them in dire straits when it's time to retire.
What if I employ a nanny, do I need to provide them with a pension?
Auto-enrolment could affect you if you have a nanny. If you pay anyone who works for you £155 a week or more, then you will be bound by law to offer them a pension.
But it's the biggest companies that will have to start auto-enrolment first, so private individuals won't have to start enrolling staff until April 2017.
The most likely option for those who will have to offer a pension is the National Employment Savings Trust (NEST), the government-run pension scheme that aims to provide a ready-made solution for smaller employers so they can meet their obligations.
What about people who regularly move jobs?
Pensions minister Steve Webb is backing a 'pot follows member' solution to the problem of people building up lots of small pensions with different employers. So small pension pots would automatically follow a member from job to job, moving from the previous employer's scheme to that run by their new employer.
Many commentators are predicting that this will be an administrative nightmare and could mean people ending up in poor-value schemes for many years.
Michelle Mitchell, charity director general at Age UK, says: "We know the difficulties that can face savers who have accumulated a number of small pension pots and we are disappointed with the government's suggested approach.
"Auto-enrolment means that the vast majority of employees will have the right to join a private pension scheme with a contribution from their employer, giving them a better chance of securing a decent retirement income but we don't believe that a 'pot follows member' approach will work well for those who move jobs often, who need to take career breaks or hold more than one job - the very people most at risk of having a poor retirement income."
The government has committed to explore further how the pot follows member approach might work, so this isn't yet set in stone.
Are there any other downsides?
Companies will face much higher costs as they will have to contribute into pensions for a much higher number of employees. As a result, they may have to make current contributions less generous and close existing final-salary schemes to new members.
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