By Rachel Wait

With life expectancy in the UK continuing to rise, planning for retirement is becoming increasingly important. Previously, it was common for employees to have a final salary pension scheme, in which your pension was a set percentage of your final salary depending on length of service with the company. Unfortunately, these schemes are closing for both new employees and old ones and as a result, the onus is on the employee to ensure they have enough money to retire on.

Now money purchase schemes are far more common where contributions to a fund are taken automatically from the employee and the employer also usually contributes too. The fund is usually run by an insurance company. But at the moment workers can decide whether to opt into a company scheme – if the company has one.

This is why the government is introducing auto-enrolment. Due to be phased in from 1 October this year, auto-enrolment will mean that employees will automatically be enrolled into their employer's qualifying pension scheme. Exactly when your employer will begin the scheme depends on the company's size. However, by 2016, all employers must have a scheme in place.

Employers can choose the qualifying scheme they use but one option is the National Employment Savings Trust (NEST) which has been set up specifically for this. But will auto-enrolment resolve the problem of insufficient retirement funds or is it only going to be a sticking plaster solution?

Pros

The major advantage to auto-enrolment is that it should encourage more people to save for retirement. After all, instead of having to opt in to a pension scheme, employees will automatically be enrolled into one and will have to make the effort to opt out instead. Compared to the approximate 50%-60% of employees that currently contribute to a pension scheme, it's estimated that this should rise to at least 80%.

"Based on past behavioural economics studies it is reasonable to anticipate that the majority will choose to stay in a pension," says Tom McPhail, head of pensions research at Hargreaves Lansdown, "thus it will achieve widespread pensions coverage at much lower cost than the approach of the past 20 years which has relied on expensive and sometimes unscrupulous salesmen."

What's more, employers will also have to contribute to the schemes, meaning employees' pension pots are further boosted. Employer contributions are invaluable, yet at the moment, some employers have company pension schemes set up but don't choose to contribute to them.

Minimum contribution levels will be phased in between October 2012 and October 2017. By October 2017, the minimum contribution level must be a total of 8% of qualifying earnings, with at least 3% coming from the employer.

Cons

It isn't all good news though. Because people will still have the right to opt out of the scheme, the rules will be more complex, making compliance more challenging and expensive for employers, says Mr McPhail.

What's more, the minimum contribution levels aren't high enough for staff to end up with a decent sized pension pot. As a general rule of thumb, you should be trying to save half your age as a percentage of your salary. So if you're 30, you should be saving 15% of your salary. Clearly this is still far off the minimum contribution level of 8%. But while money is tight for many of us, how many will realistically be able to save such a large amount of their earnings? 

Another potential problem is that some employers may currently be contributing more than the 3% minimum they will be expected to contribute once the new rules come into force. As a result, when the new scheme does start, they may decide to cut their current contributions to the minimum. So some employees could lose out, rather than gain.

This means even once people are enrolled into a pension scheme they will still need to take an active interest in their long-term savings to ensure they have sufficient funds to retire on. The danger is that savers will think that because they are in a pension scheme, their retirement is sorted out.

Rob Fisher, head of marketing for defined contribution and workplace business at Fidelity, says savers should think about the amount of income they want to have in retirement and how to go about achieving that. Fidelity has a range of tools allowing you to work out how much you need in retirement savings and Hargreaves Lansdown also offers a pension calculator.

To reap the full benefits of compound interest, it's also important to start putting money towards your pension as early as possible and contribute as much as you can.

Cash Isas are well worth considering as an additional savings vehicle and some employers now offer workplace Isas making it easy for employees to contribute from their salary. Although you don't benefit from tax relief in the way you do with pensions, all Isa withdrawals are tax-free. In comparison, pensions only allow you to take out up to a 25% cash lump sum tax-free. Cash Isas are also far easier to access than pensions, although you should only do this if it's a necessity.

Investments

It will also be important that those saving towards their pension are educated about their investments. After all, where your money is invested will have a major impact on how much you have in your pension pot when you retire. Many savers will automatically be put into a default fund and Mr Fisher points out that these funds need to be well designed to ensure they produce decent returns.

For those investing in Nest, the scheme will start investing your money in a fund which is thought to be suitable for most people of your age. In the early years, less investment risk will be taken to get your pot established. After a few years of building up your savings, your money will be invested in a slightly riskier area with the aim that your money will grow faster. As your approach retirement age, the level of investment risk will gradually be reduced.

However, there are further funds for you to invest in should you have preferences on where you want your money to be invested. So it may also be worth looking into these options. Speak to an independent financial adviser if you don't feel able to decide on your own.

Overall, auto-enrolment is a great way to encourage people to save for their retirement. However, as Mr McPhail says, "auto-enrolment is part of the answer but it is by no means all of the answer".