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Pension auto-enrolment begins today

The Government’s auto-enrolment pension scheme begins for some workers today, with the aim to get 4.3 million more people saving for their retirement by May 2014.

Part of workers’ pay will automatically be diverted to a pension scheme, as long as they are over 22 and not already part of a scheme.

Payments will start at a minimum of 0.8% of an employee’s pensionable earnings, with 1% of employees’ earnings from the employer and 0.2% tax relief. This will eventually rise to a 4% contribution from the employee, 3% from employer and 1% tax relief.

The first wave of auto-enrolment will only include the biggest firms, with more than 120,000 or more staff, such as big supermarkets and banks. The smallest companies will not have to auto-enroll their staff until June 2015 at the earliest. Workers do have the opportunity to opt out of the scheme.

As life expectancy increases, the Government is concerned that people are not saving enough for their retirement, and will have to rely solely on a state pension.

Pensions minister Steve Webb told the BBC: “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.”

Stephen Gay, of the Association of British Insurers (ABI), said: “It cannot be stressed enough how important it is to save for retirement. 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.”

But a report by the Institute for Fiscal Studies (IFS) warned that this could put pressure on families and small firms who could not afford the contributions. This could have implications for job security, pay rises and individual’s ability to afford the cost of living.

The report states: “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.”

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