What new pensions regime means for you

Britain’s new auto-enrolment pensions system has begun. On the face of it, it is hard to see much wrong with it. But the new scheme isn’t problem-free, says Merryn Somerset Webb.

Monday might not have seemed like a particularly important day to you. But to the pensions industry it really was, because it was the day in which their battle to get their hands on the savings of almost everyone in the country finally came to fruition.

Britain's new auto-enrolment pensions system, under which all businesses will eventually have to provide and contribute to a pensions scheme for their employees, has begun. At the moment, employees (unless they make the effort to opt out) will be putting in a minimum of 1% of their salaries and employers will be topping that up to a total of 2%. However, over time contributions from both parties will rise so that by 2018 the minimum total will be 8% (of which 3% will have to come from the employer).

On the face of it, it is hard to see much wrong with this. We all know that as a nation we aren't saving enough for retirement. We all know that saving into a pension makes its best financial sense if you get something from your employer as well as tax relief. And we all know that, while the state is supposed to provide uswith a pension safety net, it doesn't really have the ability to free up the resources to come good on that commitment.

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But the new scheme isn't problem-free. Aside from cost issues (some schemes are still too expensive), there are also a few groups of people for whom the scheme is almost a guaranteed money loser. Those on very low incomes might find that it costs them more than they gain: by paying in they will give up current consumption only to find that the tiny retirement pot they build up while in work means they lose out on means-tested benefits later. A reason to opt out perhaps.

Those on very high incomes might find it doesn't work for them either. A few years ago a lifetime limit of £1.5m was imposed on pension pots. At the time you could apply for "fixed" or "enhanced" protection on bigger funds so as long as you made no more pension contributions you wouldn't be hit with the new 55% taxon anything over £1.5m. That means that you'll have to opt out before any auto-enrolment payments hit your account.

And you don't just have to do it once. As The Daily Telegraph notes, anyone who opts out is automatically re-enrolled three years later. So you'll have to remember to opt out again and again. If you don't, it gets nasty. According to Ros Altman of Saga, if you have a pension pot of £1.8m, which loses its protection as a result of you not opting out, you could end up with a tax bill of £165,000 (55% of £300,000). High earners should find out when their firm will be starting auto-enrolement and ensure they opt out in good time.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.