Government pension auto-enrolment scheme starts

| October 1, 2012 | 0 Comments
Government pension auto-enrolment scheme starts

Firms with 120,000 employees or more will today start automatically enrolling their employees into a workplace pension scheme unless they chose to opt out.

Both employers and workers will contribute towards the scheme, which
will be rolled out to all firms, regardless of size, by February 2018.

It aims to ensure that lower earners will have a workplace pension to complement their state pension when they reach retirement age.

With life expectancy increasing, the government is taking steps to prevent a pension crisis in the future, with many people facing poverty in old age.

All workers over the age of 22, earning at least £8,105 a year, will automatically contribute to the new scheme unless they chose to opt out or unless they already contribute to a workplace pension.

The amount they contribute will be based on their earnings, but earnings below £5,564 a year or above £42,475 will not be taken into account.

Initially, workers will contribute a minimum of 0.8 per cent of their pensionable earnings and their employer will contribute the equivalent of 1 per cent of their employee’s earnings to the scheme.

A further 0.2 per cent will be added by tax relief.

Nest, a not-for-profit pension scheme set up under the new rules, estimates that a worker on a salary of £20,000 will contribute £2.37 a week to the scheme, their employer will contribute £3 per week and 60p will be added in tax relief.

This adds up to a total contribution of £309 per year.

Eventually, workers’ contributions will increase to 4 per cent, employers’ contributions will increase to 3 per cent and tax relief will account for 1 per cent, adding up to a total contribution of 8 per cent.

The new scheme has been widely welcomed by the pension industry.

Joanne Segars, chief executive of the National Association of Pension Funds, said: “The UK is drifting towards an iceberg when it comes to paying for its old age, and we need radical reform like this.

“Crucially, this reform will reach those who have no pension: the young, the low-paid and those working for small businesses.”

Meanwhile, Labour leader Ed Miliband has called for a 1 per cent cap on pension charges.

The Guardian reports that Mr Milliband told delegates in Manchester that pension companies take “thousands of pounds in hidden fees and charges” from retirement funds.

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