UK employers must offer a workplace pension and enrol all eligible employees. In practice, this means that when most workers join a new business, they are auto-enrolled onto the company’s pension scheme. Eligible employees do not have to ask to be added, they are opted-in automatically. This process was introduced by the government to encourage workers to save for their retirement. With final salary pensions close to extinction in the private sector and the state pension age continuing to rise, most employees will need to look after their private pensions to have something to live off in retirement.
In this article, we explain how auto-enrolment works for employers and employees, what you might need to do about your workplace pension and how to make sure auto-enrolment is working for you. If you are an employer looking to set up an auto-enrolment pension for the first time, check out our article 'How to set up an auto-enrolment workplace pension'.
How does auto-enrolment work?
Eligible workers should be added to their workplace pension scheme by their employer without needing to ask. This means that a company employing any eligible workers will need to set up a workplace pension. Prior to rule changes, employees had to make a request to join if they wanted to be part of the company’s pension scheme. This opt-in system was seen to be a barrier to workers taking the necessary steps to start saving for their retirement.
Contributions to the workplace pension are automatically taken from an employee's salary once they are enrolled. The employer also has to make regular contributions.
To be eligible for auto-enrolment, you will need to be over 22 years old and earning at least £10,000 per year from one job. You can choose to opt-out if you don’t want to be part of the workplace pension.
An employer is legally responsible for ensuring all eligible employees are enrolled in the workplace pension scheme every three years. This means that even if an employee has previously opted out, they will be auto-enrolled again.
Who is eligible for auto-enrolment?
Not every employee will qualify for auto-enrolment. There is a set of criteria that a worker will need to fall into to be considered eligible. They must:
- work in the UK (or reside in the UK if working offshore)
- be over 22 years old but under State Pension age
- be paid more than £10,000 per tax year from one job
- not already be part of a suitable workplace pension scheme elsewhere
This applies even if a worker is on a short-term contract, works part time, is away on parental leave or is paid through an agency.
Employees earning less than £10,000 but more than £6,240 in a tax year will not be auto-enrolled. However, if they ask to join the workplace pension, the employer cannot refuse and must make at least the minimum employer contributions. You do not need to enrol yourself in a workplace pension if you are self-employed or the sole director of a limited company with no other members of staff.
Auto-enrolment contributions
Pension contributions are usually calculated as a percentage of an employee’s pay.
There is a minimum combined contribution that will need to be made to a workplace pension by the employer and employee. At least 8% of qualifying earnings must go into a workplace pension as part of the auto-enrolment process, 1% of which will be government tax relief on employee contributions. The 8% can be made up of different combinations of contributions, but the employer must pay at least 3%. For an employee, this would mean having to pay at least 4% of qualifying earnings if their employer is paying 3%.
Qualifying earnings are defined as any pay between £6,240 and £50,270 per tax year. This means that someone earning £25,000 a year would have qualifying earnings of £18,760 (£25,000-£6,240). Someone earning £50,270 or more would have £44,030 of qualifying earnings (£50,270-£6,240).
Employers can choose a contribution percentage higher than 3% and apply it to an employee's entire pay package, not just their qualifying earnings. Qualifying earnings are only the minimum. Employers cannot set auto-enrolment contributions so high as to encourage employees to opt out.
Some employers will incentivise workers to pay into the workplace pension by increasing employer contributions if an employee chooses to increase their contributions too. For example, a company might match employee contributions up to 8%.
Where do your auto-enrolment contributions go?
It is important to remember that your pension contributions go to the pension provider chosen by your employer, not directly to the company you work for. This means that you can access or transfer your pension if you leave that company and that your money will be protected if your employer goes out of business.
How to check if you have been auto-enrolled
Employers are required by law to auto-enrol eligible workers into a workplace pension scheme. If you fit the eligibility criteria, you should be enrolled already. You will know if you have been enrolled by your employer because the pension deductions will appear on your payslip.
Employers also need to notify employees in writing that they have been auto-enrolled. Workers need to be told:
- what they will contribute
- how much the employer will contribute
- when they were added to the pension scheme
- the type of pension scheme
- who runs the pension scheme
- how to leave the scheme
- how tax relief is applied
How to opt out of auto-enrolment
Many workers will find that opting out of their workplace pension means giving up extra money from their employer. Employer contributions can make a significant difference to the value of your pension pot as they accumulate over time, so you should think carefully before deciding to opt out of a workplace pension. However, you do not have to keep paying into your workplace pension. For someone facing particular financial hardship, paying into a pension might be unaffordable. It might also make financial sense to pay off high-interest debt rather than contribute to a workplace pension.
Opting out of your workplace pension is a big decision, as saving for your retirement is a critical part of managing your finances. If you do choose to opt out, keep in mind that your employer may auto-enrol you again. This is because employers are required to ensure all eligible employees are enrolled in the workplace pension scheme every three years.
Transferring your auto-enrolment pension
One consequence of auto-enrolment can be that workers accumulate workplace pensions from multiple employers as they change jobs. Once someone leaves a job, they will often not be able to pay into their pension and the employer will not need to make contributions.
However, in most cases, the worker can transfer the old pension to a new workplace pension or a personal pension. This can provide the pension holder with better control over where the money is being invested and how effectively it is growing. Alternatively, they could leave it in their old workplace pension scheme and access it once they reach retirement age. You can find out more about pension transfers by reading our article ‘How to transfer your pension – everything you need to know‘.
If you are worried you do not know enough about your workplace pension provider, we have handy reviews of some of the UK’s biggest. Read our independent ‘Nest pension review’ and ‘Penfold pension review’ to learn more.
Setting up an auto-enrolment pension
Setting up auto-enrolment pension can seem daunting for a new employer, but there are actually a series of simple steps to follow. The easiest way is likely to be through Nest, an organisation set up by the government to help businesses adapt to auto-enrolment. Alternatively, you can find details on how to get a workplace pension up and running and how to auto-enrol new staff by speaking to pension specialist Penfold*.
Pension need-to-knows
Here are some important pension questions we think you should know the answer to.
What is a workplace pension?
A workplace pension is a form of private pension that employees can contribute to directly from their salary. They also benefit from their employer making regular contributions. If you need more information on the basics of a private pension, read our article ‘What is a private pension?’.
A workplace pension is set up by an employer for its workers. This means that individuals may have less of a say in where their money is invested, but they also have less of the responsibilities that may come with a personal pension.
In some cases, a workplace pension will be linked to an employee’s final salary, known as a defined benefit pension or final salary pension. These are growing increasingly rare. Workplace pensions in the UK are more likely to be defined contribution pensions. This means that the money you get when you retire will be based on the value of what you have contributed and grown over the years. You can find more details in our article ‘How do private pensions work?’.
Do workers have to join the workplace pension scheme?
A feature of auto-enrolment is that employees are added automatically. However, workers do not have to remain in the workplace pension scheme after they are auto-enrolled. To opt out, they must complete an opt-out form and return it to their employer.
Opting out within one month of auto-enrolment will mean any pension contributions already paid will be refunded. Even if an employee has previously opted out, they will have to be auto-enrolled again at some point. This is because the employer is legally responsible for ensuring all eligible employees are enrolled in the workplace pension scheme every three years.
If someone eligible has opted out, they will be re-enrolled and need to opt out again if they choose to. Learn more about how to save for retirement in our article ‘Are pensions worth it?’.
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