Millions of people may be counting the cost of the Autumn Statement's freezing of most tax credit payments, but an important change to pensions announced last week could also hit their finances hard.
Under pressure from business, the Government has delayed the scheme to auto-enrol all UK staff into a pension scheme in 12 months. Originally all staff from small firms who were not already members of their company pension scheme were going to be auto-enrolled from April 2014. This date will now be shifted to after the next election in May 2015 for staff of firms with fewer than 50 employees; bigger firms will still have to stick to an original deadline of October 2012. This may give employers some welcome breathing space but for employees, it means at least four million people will potentially miss out on £214 a year.
"The impact of just one year's delay is very significant because of compound interest on investments made. This will have a long-term and lasting impact," says Julian Webb, the head of workplace savings business for Fidelity, the fund management group.
The move has sparked accusations that the Government is in panic mode after a warning to the Treasury that a double-dip recession is just around the corner. The delay may be good news for employers and possibly the government-run Nest scheme (National Employment Savings Trust, a simple national pension for employees who are not members of their own company scheme or whose companies do not offer a workplace pension) as they may need more time to get organised. However, employees working for small businesses are arguably those most in need for auto-enrolment because they are the least likely to make pension provision.
As well as causing people to miss out on a year's worth of employer contributions, this delay means that the phasing in of contribution increases will start later too, so employees have less money going into their pension pots for a shorter amount of time.
"The increase in contributions can take place only once all employers have been subject to auto-enrolment, so by delaying it for small businesses, it delays everyone," says Mr Webb.
Those closer to retirement will be worse off because they will have less time to make up the shortfall. Fidelity says that with this delay someone on average earnings could be £214 worse off a year, all for an overall employer saving of £663 over the next seven years. For a 50-year-old male retiring in 15 years' time, it would mean a 10 per cent reduction in retirement income.
The need to build up a substantial pension pot is brought into even sharper focus by the Government's announcement in the Autumn Statement that the age at which Britons can collect their state pension is to rise to 67 from 2026, eight years sooner than had been planned. "This highlights the need to be prepared over pensions because the state pension age landscape seems to be shifting all the time," Mr Webb said.
This will not affect those working for bigger companies who will be brought into the new auto-enrolment scheme in less than a year, marking the biggest pension reform for a generation. Under auto-enrolment, employers will have to offer all employees access to a pension and contribute at least 3 per cent towards it. Workers are free to opt out but it is hoped that because they must actively choose to do so, people's inertia with regards to pension planning will work positively for once and people will think it is too much hassle to opt out.
It is difficult to argue against the case for workplace pensions that offer employer contributions simply because of the considerable impact in can have on your potential pension pot. The mantra for pension saving is to start as early as possible to maximise the benefit of compound returns. Allan Maxwell from Corporate Benefits Consulting says he would class the Government's decision as "short-term gain for long-term pain" because the earlier someone starts to save, the less they have to set aside each year.
"Someone in their twenties should be saving between 10 and 15 per cent of their annual earnings. For those in their thirties with no previous savings, this will increase to between 15 and 20 per cent and so on," he says. "For those closer to retirement the amount of savings required becomes unmanageable. Anyone in this group who has not started to save will have to consider working longer or reducing their standard of living in retirement."
However, there are some issues to be ironed out. First of all, the state-backed pension scheme Nest will charge 0.3 per cent plus an initial 1.8 per cent on contributions. It could face a challenge from Danish firm ATP and its new workplace scheme NOW: Pensions which has the same 0.3 per cent charge plus a £1.50 admin fee.
"The Nest charges are higher than those available currently on the market. They say they will bring them down – but that's just words at this stage," says Harry Katz from independent financial adviser (IFA) Norwest Consultants. "They are also under pressure from the Danish provider who is proposing to significantly undercut them on charges."
Fundamentally, auto-enrolment is still a huge experiment. There are lots of factors that will determine whether it is a success or not, including the number of people who decide to opt out, whether employers reduce their average contributions to offset the extra costs and, most importantly of all, whether auto-enrolment does actually bring about a change in people's attitude to retirement saving.
It may be that for some people, saving into an individual savings account (ISA) is a better option, particularly for those nearing retirement who want flexibility.
"There are many ways to save for retirement. While pensions are the most tax-efficient method this does not mean that they are the only route. Alternatives such as ISAs should not be ignored; they offer tax relief on investment growth and the funds are more accessible. However, once they are spent they are spent," says Mr Maxwell.
How auto-enrolment works
*Under the auto-enrolment scheme all employers will eventually have to offer workplace pensions and contribute at least 3 per cent of their employees' salary, with the employee adding at least 4 per cent.
*The auto-enrolment programme kicks off in autumn 2012 with various deadlines for different-sized firms. But with this U-turn on timing for small businesses, those with fewer than 50 employees have a one-year extension to prepare for the new rules and their contribution responsibilities. This means that instead of 2014, the deadline for these firms has been extended by one year until after the end of this Parliament in May 2015.
*Auto-enrolment for larger companies will start as originally planned in October 2012, but the delay does mean that the minimum employer contribution will remain at 1 per cent for another year instead of rising in 2016.
Julian Webb, Fidelity
"We know that the most poorly served individuals as far as pensions are concerned are those who work for small businesses. The medium to large businesses have traditionally provided workplace pensions but it's the smaller employers that haven't really been able to establish them. This is going to hit the people who need pension provision and auto-enrolment the most."