Pension auto-enrolment: how it works
By Paul Davies
Pension auto-enrolment: how it works
Automatic enrolment is an initiative that was introduced by the government to help more people save for their retirement. Which? explains how these workplace schemes operate.
From October 2012 onwards, employers have had to start to enrol their staff into workplace pension schemes. Large firms were the first affected, and smaller employers will be included between 2013 and 2018.
Auto enrolment - will I be affected?
You will be automatically enrolled into your work's pension scheme if you meet the following criteria:
- You aren't already in a qualifying workplace scheme
- You are aged at least 22
- You are below state pension age
- You earn more than £10,000 a year in 2017/18; and
- You work in the UK.
Auto enrolment - when it happens
It will take place at different stages for companies of different sizes:
- Large companies, with 120,000 or more employees, were enrolled in October 2012.
- Companies with up to 2,000 staff were enrolled in August 2013,
- and companies with 250 employees or fewer implemented auto-enrolment in February 2014.
The process will continue until 2018, which is the staging date for businesses with fewer than 30 employees and new businesses.
Auto enrolment - what it means for me
If you're already enrolled in a workplace pension and it's a defined benefit (DB) scheme, your employer will just have to ensure that the scheme meets certain requirements. These requirements are:
- A valid contracting-out certificate, showing that the scheme is an appropriate replacement for the state second pension; and
- Providing the right level of benefits for a contracted out scheme
Contracting out disappeared as an option on 6 April 2016.
If you’re in a defined contribution (DC) scheme, the money you, the government and your employer pay into your pension is expressed as a percentage of 'qualifying earnings' (between £5,876 and £45,000 in 2017/18, inclusive of bonuses and commission).
The minimum amount you and your employer have to contribute under auto enrolment will gradually increase between 2012 and 2018.
- From 2012 to 2017, the overall minimum contribution is 2% (employers 1%, employees 0.8%, plus tax relief of 0.2%)
- From 2017 to 2018, the overall minimum contribution is 5% (employers 2%, employees 2.4%, plus tax relief of 0.6%)
- From 2018 onwards, the overall minimum contribution is 8% (employers 3%, employees 4%, plus tax relief of 1% )
These are just minimum amounts – both parties can contribute more.
Can I opt out of auto-enrolment?
You can opt out at any time you want to. If you opt out within the first month, your payments will be refunded in full. If you opt out after the first month, any payments you've made will stay in your pension pot.
Opting out isn't final – you can rejoin at a later date. Also, employers will be required to re-enrol you every three years, so you can reconsider your decision.
Auto enrolment - why it was introduced
Currently, not all employers offer a pension scheme to their staff. In 2012, the year auto-enrolment was introduced, only 46% of UK employees were enrolled in workplace pension schemes. You can read more about workplace pension schemes in our guide, what is a company pension?
Membership is particularly low in sectors such as construction, retail and accommodation. The problem with this is that employees with no workplace pension savings will face a 'pension gap' when they come to retire, because the state pension isn't enough to live on. Our guide, Your state pension and benefits, has more on your state pension entitlement.
Auto-enrolment will ensure that these workers have at least some savings to fall back on in retirement, although it won't completely solve the problem of the pension gap.
- Last updated: April 2017
- Updated by: Paul Davies