A scheme to enrol millions of people into workplace pensions automatically will be launched on Monday. Up to 10 million are expected to be enrolled eventually in what is hailed as the biggest pensions revolution since David Lloyd George ushered in state pensions a century ago.
A handful of the largest employers, with 120,000 or more workers, must place eligible workers into schemes. Firms will join the scheme in a staging process over the next six years.
More than half a million people will have joined by Christmas, according to government estimates. Savers will typically need to put aside just over £2 a week to get them started, according to Nest, a not-for-profit pension scheme set up under the new rules.
In the first four years, workers contribute a minimum of 0.8% of earnings, around £2.37 a week for someone on £20,000, Nest estimates. Employers will contribute nearly £3 per week, and almost 60p will be added in tax relief, meaning the total going in is just under £6 a week: £25 a month or £309 a year.
But by 2018, as the minimum contribution increases, employees will be putting aside around £12 of their pay every week, in return for almost £9 from their employer and nearly £3 in tax relief, leading to average annual contributions of £1,235, Nest said. Automatic enrolment aims to tackle growing concerns about an old-age poverty crisis, as people live for longer but fail to put enough away for their later years. Recent official figures show that the number of private sector workers paying into a pension is at its lowest since records began in 1953. Last year 2.9 million private sector workers put money into schemes, the first time active membership has dipped below 3 million.
Joanne Segars, chief executive of the National Association of Pension Funds (NAPF), said: "The UK is drifting towards an iceberg when it comes to paying for its old age pensioners, and we need radical reform like this."
NAPF said its research shows that only a quarter (24%) of workers earning £14,000 or less save into a workplace pension. "Crucially, this reform will reach those who have no pension: the young, the low-paid and those working for small businesses," Segars said.
Estimates of opt-out rates are varied, although the government believes the reforms will eventually lead to between 6 and 9 million people beginning saving or saving more in all forms of workplace pensions.
The TUC's general secretary, Brendan Barber, said: "With this government and the last helping ensure a wide consensus around the reform package, we have some certainty that we are now at the beginning of a pensions new deal. Of course it can and should be made better, but we now have what should be a stable framework."
Some analysts have said the government should go further in encouraging people to save, for example by making pensions more flexible so that workers can take some cash out if they need to – or by increasing tax-free Isa allowances.
