Automatic enrolment into a workplace pension, which starts for some on Monday, will affect millions of people.
For many workers, this will be the first time their employer has contributed to their pension savings.
However, the Institute for Fiscal Studies (IFS) says that the impact on total saving is "ambiguous".
Under the new scheme, a slice of a worker's pay packet will automatically be diverted to a pension pot, assuming they are aged over 22 and not already part of a workplace pension scheme.
At first this will only amount to a minimum of 0.8% of their pensionable earnings. Their employer will, by law, be obliged to add the equivalent of 1% of their employee's earnings to the pot. Tax relief adds another 0.2%.
Eventually, these minimum contributions will rise to 4% from the employee, 2% from their employer and 1% in tax relief.
These funds will be invested in the company's workplace pension scheme, by a scheme run by an insurance company, or by a government-backed scheme, such as the National Employment Savings Trust (Nest).
At retirement, usually at the age of 55 at the earliest, the employee can access the funds to buy an annuity - an annual pension income for retirement.
Only the largest employers, such as the big supermarkets, will be involved in the first wave of automatic enrolment. Others will then join as the system is rolled out.
The smallest firms will not sign up their staff until June 2015 at the earliest.
Optingout
The government says that automatic enrolment is vital as workers should not rely solely on the state pension when they retire, especially as life expectancy increases.
Kerry Lightfoot, an employee of Morrisons in Redcar is just signing up for a workplace pension.
"I am getting to an age now where I do have to think about my future, even if I am only the ripe old age of 26.
"You don't know what is around the corner so it is best to start saving as soon as possible.
"It is good to know that I have looked after myself so I am prepared for the future.
"Money is always a worry, but as I am in a position to do it now, it is a good start."
The policy has been welcomed by a number of campaigners and the insurance industry.
"It cannot be stressed enough how important it is to save for retirement," said Stephen Gay, of the Association of British Insurers (ABI).
"Automatic enrolment will help workers start a savings habit that will stay with them for a lifetime. The state pension is a foundation, but most people need more and the earlier people start to save, the easier they will find it to build enough savings for their later life."
Workers will have the option to opt out of the pension savings scheme, and will be given details before they start to see funds being diverted from their pay packet.
"Some people might think about quitting their new pension, but we urge them to stick with it and get saving for their old age," said Joanne Segars, chief executive of the National Association of Pension Funds (NAPF).
"Leaving the pension would mean losing tax breaks and employer contributions which are, in effect, free money."
The new system is likely to increase pension saving. Last year, only one in three private sector employees were signed up to a scheme.
The Department for Work and Pensions said that, by the end of the year, about 600,000 more people in the UK would be saving into a workplace pension and by May 2014 about 4.3 million people would be signed up.
"If we can get between six and nine million more people saving in a pension by the time all employers are in, that is a genuine savings revolution," said Pensions Minister Steve Webb.
However, the IFS suggested that the effect on overall saving was unclear.
Some people who might have saved more into a pension might now stick to the minimum contribution level. Others might reduce other forms of saving, or decide not to run down existing debts, the IFS said.
Some employers might choose to fund their contributions by lowering pay rises, charging higher prices, or taking a cut in profits. All these might have the effect of cutting saving by households.
"Simply getting more people to save in a pension will not achieve the government's overall objectives if it is also accompanied by a reduction in the amounts saved into pensions or saved in other forms," said an IFS report.
No comments:
Post a Comment