Tony Levene is a renowned financial journalist, who has previously been a columnist for Guardian Money. He has written several books, including 'Investing for Dummies' and won the ABI Lifetime Achievement award and the Headline Money award.
There's a new pension plan on the block that will affect an estimated eight million people but the likelihood is that unless you closely read the financial pages, you will have heard little about it.
It's called auto-enrolment and the idea is that employees will find themselves in a workplace pension scheme with pay packet deductions unless they positively opt out. The new scheme started on October 1, but so far it has affected very few. Auto-enrolment is to be phased in between now and April 2017. It started with companies with over 120,000 employees and by New Year's Eve, it will still only apply to firms with 50,000 upwards.
The majority of large employers already have pension schemes as good or better than this new plan. It will take over four years before the roll-out to the smallest employers - those with 30 or fewer qualifying employees and least likely to offer pensions - is complete. The employer definition could include someone employing a live-in nanny or carer or a part-time gardener.
The rules dictate that anyone qualifying - aged 22 to state retirement age (currently 65 for a man and between 60 and 65 for a woman depending on her date of birth) and earning more than £8,105 a year - must be join. Employees who do not automatically qualify still have the right to join.
Previous pension plans have flopped. There are few remaining private sector final salary pension plans, while stakeholder take up was low as employers were not obliged to contribute. Auto-enrolment forces employers for the first time, to pay in so the hope is that few will exercise their right to opt out as they will lose the boss's payment.
The majority of large employers already have pension schemes as good or better than this new plan.
The big question is whether the minimum employer payment will persuade hard-up employees, who must also contribute, to stay in. Between now and September 2017, employers must pay in one per cent of employee earnings currently between £5,564 and £42,475 a year. For the year after that, it is two per cent with three per cent from October 2018 onwards. Employers can and many already do pay in more. The employee will have to pay a minimum two per cent until September 2017, five per cent for the following year and then eight per cent substantial percentages for many even after income tax relief. Those that opt out will lose the employer payment but they will have to consider this in the light of their other finances. For many, especially older, employees, the new scheme will make little difference to their eventual retirement income. In some cases, it could affect means-tested benefits although as those goal posts seem always changing, it is hard to make concrete plans.
The most youthful employees may not want to tie up money for what could be fifty years again with no certainty as to the final pension outcome. It is this uncertainty that will dissuade many others. As with many current pension plans, everything will depend on investment performance, the costs of running a plan and annuity rates on retirement. These can't be predicted for five, let
alone 25 or 50 years.
Pension buyers will have to pay in more to get a reasonable standard of living. One very rough rule to retiring at 65 on half salary is to divide your present age by two and then pay in that number as a percentage of your present earnings. So even combining employer and employee amounts, the percentages fall well short of the 15% needed by someone in their early thirties or the 25% for someone in their early fifties.
Auto-enrolment will make some difference forcing employers to contribute for the first time is a major step. But whether this initiative's hope that we'll be turned into a nation of pension savers is realised is still very much up in the air.