Biggest pension change in 100 years - but how much do you know?

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Iain Duncan Smith
Iain Duncan Smith is hoping to get more people saving for pensions through 'automatic-enrolment' Photo: ITV News

They are calling it the biggest boost to pensions for a century -changes that will effect millions were launched today from a small supermarket in Chelsea. From this posh post code the Work and Pensions Secretary Iain Duncan-Smith told me of a long awaited scheme designed to help some of the poorest retirement savers in the UK.

This morning he told me how proud his government is to bring out auto-enrolment, a system in which millions will be automatically included in workplace pension schemes. The system goes live within days, at the start of October - yet millions know little about it.

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How will the new pension scheme work? Credit: ITV News

Here is how it works for now:

  • Workers pay 0.8% of salary into a pension
  • Employers will add 1%
  • With 0.2% tax relief
  • Totalling 2% of earnings being saved for retirement

But this will increase gradually over the next six years, so by 2018 it will work like this:

  • Workers pay 4% of salary into a pension
  • Employers will add 3%
  • With 1% of tax relief
  • Amounting to a minimum of 8% of salary being saved for retirement

We all have retirement dreams - but the reality is that at least 11 million people - many of them struggling to pay even basic bills - are not saving enough for retirement. But is auto-enrolment really the solution? Trust in pensions is low - and that means workers may simply opt-out . Research suggests a third will do just that. And those that remain may find the retirement savings they end up with pitifully small.

Ros Altmann the head of Saga, also a pensions expert by profession, fears 8% is simply not enough. Experts say we need to be saving at least 12% - so even at its outset the government's showcase initiative seems inadequate to many independent observers.

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Is pension auto-enrolment the solution to get people saving for retirement? Credit: Gareth Fuller/PA Wire

Opting-out from auto-enrolment will be an option and anyone who opts-out within a certain period will be refunded any pension payments already made. But it's hoped that introducing a default pension scheme will mean that more people will start saving for their retirement.

From October 1, the largest employers, with 120,000 or more workers, must place eligible workers into schemes, with firms gradually being enrolled in a staging process over the next six years. People with more than one employer will automatically be enrolled in to each of their employer's pensions providing they fit the criteria and earn more than £8,105 a year for that employer.

Small businesses fear the cost and bureaucracy - even though they will be given far longer than large firms to comply with the scheme.

We workers may have been slow to start saving for older age - but politicians too have taken their time. The new scheme was first mooted in 2006 - only now is it being launched. It is only the first step - many questions remain - and yet few doubt that this is the start of a new era in the way Britain plans for retirement.