What is automatic enrolment in pensions?
Auto-enrolment is an initiative introduced by the UK government to encourage more individuals to save for their retirement. Within this framework, employers are obligated to automatically enrol their eligible employees in a workplace pension scheme and contribute to it on their behalf.
How does auto-enrolment work?
If you meet the specified criteria, you don’t need to seek permission from your employer to join their workplace pension scheme; they are required to enrol you automatically. Should you decide not to participate, you have the option to opt out. Once you are part of the scheme, both you and your employer contribute to your pension plan. While there are minimum contribution amounts mandated for both parties, the possibility of contributing more than the minimum will be discussed later.
Employers are obliged to re-enrol certain eligible employees every three years. Therefore, if you opt out or contribute less than the minimum requirement, your employer should re-enrol you at a later stage. If you still prefer not to contribute to your workplace pension, you will need to opt out again.
What are the eligibility criteria for automatic enrolment?
You qualify for automatic enrolment if:
- You are employed in the UK.
- Your annual earnings are £10,000 or more.
- You fall within the age bracket of 22 years old to State Pension age.
If you do not meet these criteria, there is a likelihood that you can still access a workplace pension. For instance, if your earnings are below £10,000 but exceed £6,240, you have the option to join a workplace pension scheme, with your employer contributing – albeit, you would need to inquire first. This also applies if, for example, you are only 20 years old. If your annual earnings are below £6,240, you can request to be part of a pension scheme, but your employer is not obligated to make any contributions.
What are the minimum payments for auto-enrolment?
In most cases, you and your employer will make payments based on anything you earn above £6,240 but below £50,270. At a minimum, your employer usually needs to pay in 3% of these earnings, while your minimum payment is normally 5% – so a total of 8%.
Benefits of auto-enrolment
Increased Savings Participation: Millions of individuals are now actively saving money through auto-enrolment. As of April 2021, the UK witnessed a workplace pension participation rate of 79%, a substantial rise from less than 50% in 2012. Over 10 million people have been automatically enrolled, indicating a significant surge in pension savings.
Addressing Longevity Challenges: With people living longer, the need for greater retirement savings has become imperative. The current full State Pension, falling below £10,000 annually, may not align with many individuals’ retirement aspirations. Auto-enrolment has emerged as a solution, facilitating millions of workers in building savings for their future.
Simplicity in Process: Auto-enrolment is recognized for its simplicity in contributing to a pension. With employers handling most of the administrative tasks, individuals are spared the effort of searching for pension plans. Contributions seamlessly come out of the salary, requiring minimal intervention from the contributor.
Employer Contributions: Employers actively contribute to the pension plan through auto-enrolment, contributing to the growth of the pension fund. Some employers may surpass the minimum 3% contribution, and some even offer matching contributions based on the employee’s payments. Inquiring about such possibilities can significantly enhance one’s savings.
Tax Benefits: Participation in workplace pension schemes often entails tax benefits, although the specifics can vary among schemes. Some employers provide tax benefits through salary sacrifice or exchange schemes, emphasizing the need to clarify the structure with the employer. In certain workplace pension schemes, the government adds money to the pension through tax relief. The extent of tax relief usually correlates with the individual’s income tax rate. For instance, at the current basic income tax rate of 20%, an individual contributing £100 to their pension would effectively invest £80, with the government contributing the additional £20 (equivalent to the income tax it would have collected). The mechanics of this process are illustrated below.