What does auto-enrolment really mean for you?

In 2012, we saw the dawn of 'auto-enrolment' into workplace pension schemes. You could be forgiven for not noticing at the time, because it is being introduced at a snail's pace, and it still hasn't been fully rolled out. However, at some dim and distant point in the future, the government is hoping it will plug the pensions gap. The question is whether it will do this fast enough, and fully enough to give you a comfortable life in retirement.

How it works

The idea behind 'auto-enrolment' is that millions of people miss out in a workplace pension because they don't get around to joining. Under 'auto-enrolment', as long as you earn above the minimum threshold (£10,000) and are at least 22-years-old, you are automatically brought into the scheme - unless you specifically opt to stay out of it. Even if you do opt out - you will be automatically enrolled the following year, and will have to opt out again. It means the vast majority of people will end up having a workplace pension.

The government didn't want to scare anyone in the early days, so as a sop to employers, it has been rolling it out spectacularly slowly. It started with the larger employers - so smaller firms had plenty of time to implement changes. It will only make it into every workplace by 2018.

It also started with incredibly small contributions. At the outset, employees only have to pay in a paltry 0.8% of earnings, and your employer 1%. You get an additional 0.2% in tax relief from the government - taking you to 2% overall.

This amount is set to rise between 2018 and 2019 to 5% of your earnings (2.4% from you, 2% from your employer and 0.6% tax relief). It will then rise again in April 2019 to 8% of your earnings (4% from you, 3% from your employer and 1% as tax relief).

The shortfalls

The problem with this is that 2% of your income is not going to make much difference at all to your retirement. Even 8% is not enough.

Recent figures from the Office for National statistics found that although auto-enrolment had pushed pension membership to a record high, the average contribution was currently 4%. Former pensions minister Steve Webb, who is now director of policy at Royal London, called this "a genuinely shocking figure".

He added: "A combined contribution rate of three or four times this size is likely to be needed for most workers to have something approaching a comfortable retirement. It is quite clear that mass membership of pension schemes through automatic enrolment is just the start of a very long journey."

What Webb is saying is that even if you were paying 8% into your pension from the age of 22, you wouldn't be saving enough for a comfortable retirement.

Latecomers

It's particularly worrying for the many millions of people who have been automatically-enroled into a pension mid-way through their career. They may have saved nothing for the first decade or so in work, and are now saving a very tiny amount of money into their pension. As a result they are predicted to fall a long way short of their retirement income expectations.

The only way any of us can tell what we are likely to retire on is to use an online pensions calculator. If you input what you have saved so far, and what you are saving each month, it will let you know what you are likely to have to live on.

It's worth highlighting that this will make troubling reading for many. The only hope is that people aren't terrified to a standstill, and use this opportunity to work out how much more they should be putting into their workplace pension - and other savings - in order to secure a comfortable retirement.