Auto enrolment pensions: the basics
Since October 2012, employers have had enrol their staff into workplace pension schemes as part of a government initiative to get people to save more for retirement.
It is now compulsory for employers to automatically enrol their eligible workers into a pension scheme.
The employer must also pay money into the scheme.
When does auto-enrolment apply?
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 2018/19;
- You work in the UK.
Do I need to join the auto-enrolment pension scheme?
You don’t have to, but opting out isn’t usually a sensible decision as you’ll lose out on employer contributions.
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 re-join at a later date. Also, employers will be required to re-enrol you every three years, so you can reconsider your decision.
Auto-enrolment: how much do I contribute?
There are minimum contributions that you and your employer must pay. Minimum contributions are being gradually increased over time.
Both you and your employer can choose to contribute greater amounts to the pension if you wish.
If your employer contributes more than its required minimum amount - but less than the total minimum amount - you only need to make up the shortfall between the total minimum and the employer contribution.
Auto enrolment contribution rates 2018
Our table highlights what the different parties must contribute to auto enrolment pensions.
|Period||Employer minimum contribution||Staff contribution||Total minimum contribution|
|Until 5 April 2018||1%||1%||2%|
|6 April 2018-5 April 2019||2%||3%||5%|
|6 April 2019 onward||3%||5%||8%|
How do I opt out of pensions auto-enrolment?
Opting out involves getting an opt-out form from your pension provider or doing so via an online account.
You can get contact details of the pension company from your employer.
If the form is completed and returned to your employer within one month of being automatically enrolled, any money you have paid into the pension will be refunded, otherwise the money will be held into the scheme until you can access it.
How does the auto-enrolment minimum contribution work?
Your minimum contribution applies to anything you earn over £6,032 up to a limit of £46,350 (in the tax year 2018/19). This includes overtime and bonus payments.
If you were earning £25,000 a year, your contribution would be a percentage of £18,968 (the difference between £6,032 and £25,000).
It’s down to your employer to confirm how much of your earnings you’ll need to contribute.
What if I am in a workplace pension scheme already?
If you are an existing member of a workplace pension scheme and it meets certain minimum standards (ie it is a ‘qualifying scheme’), you will not be affected by automatic enrolment.
However, if contribution levels fall below the minimum contributions for an automatic enrolment scheme, you and/or your employer may need to start or increase contributions.
What is a qualifying workplace pension scheme for auto-enrolment?
Your employer’s pension scheme must meet some minimum criteria before an employer can automatically enrol workers.
Schemes can be UK-based or a non-UK scheme, they must be tax registered and need to meet minimum requirements that vary according to the type of pension scheme.
Qualifying schemes can be either defined benefit or defined contribution pension schemes.
Auto-enrolment: what if I have more than one job?
For people with more than one job, each job is treated separately for automatic enrolment purposes. You can still opt out of individual schemes if you want.
Each of your employers will check whether you’re eligible to join their pension scheme. If you are, then you’ll be automatically enrolled in that employer’s workplace pension scheme.
Can I transfer pensions from my previous companies to my employer’s pension scheme?
Some schemes allow transfers in, but not all of them. NEST (The National Employment Savings Trust) does not currently accept transfers from other pension schemes.
Most other pension schemes may accept transfers in, but there may be a minimum value that they accept. You should check this with the scheme’s administrator to find out about transfers.
Does auto-enrolment apply to me if I’m self-employed?
Self-employed workers aren’t automatically enrolled into a pension scheme. It’s still sensible for you to plan for your retirement and open a pension plan.
You can opt for a personal pension or a self-invested personal pension (Sipp) to invest your retirement savings. You’ll get a contribution from the government in the form of pension tax relief – 20% for basic-rate taxpayers or 40% for higher-rate taxpayers.
What is Nest auto-enrolment?
Nest stands for National Employment Savings Trust. It is a low-cost workplace pension scheme that has an obligation to accept all employers that want to use it.
Nest was set up by the government to make the process of auto-enrolment easier for employers.
How much can you pay in via Nest?
Contributions into Nest will be the same as they are for other defined-contribution auto-enrolment schemes, in that you pay a percentage of your salary (currently 2% and rising to 3% in April 2019) into your Nest pension scheme.
Other people, such as family and friends, can also pay into Nest for you.
Like all other workplace pension schemes, you’ll receive tax relief from the government on your contributions.
What are the charges with Nest?
Nest's charges are relatively low. There are two charges for employees who use Nest:
The first is a 0.3% annual management charge (AMC).
The second charge is a 1.8% charge on each contribution. This means that for every £50 that goes in, you keep £49.10 of it.
This charge is in place to pay back the government loan used to set up Nest.
There are no charges for transferring pots into Nest – you’ll only pay the standard AMC of 0.3% on your transferred fund.
The minimum you can transfer in is £50. There are also no charges if you want to transfer pots out of Nest.
Nest investment choices
There are six fund types available through Nest. The Nest Retirement Date Fund is the one that most members stick with, which works by enrolling members into the fund that targets the year they expect to take their money out of Nest.
The Retirement Date Fund aims to target investment returns in excess of inflation after all charges, over the long term.
Nest also offers additional fund choices. These are:
- Nest Ethical Fund
- Nest Higher Risk Fund
- Nest Lower Growth Fund
- Nest Pre-retirement Fund
- Nest Sharia Fund
What is People’s Pension?
An alternative to Nest is People’s Pension which is a multi-employer, defined contribution pension scheme which has master trust status.
It may be that your employer uses People’s Pension as their workplace pension scheme provider. People’s Pension is operated by not-for profit organisation B&CE.
How much can you pay in via People’s Pension?
Schemes operated by People’s Pensions are the same as other pension schemes, with contributions made by you, your employer and the government.
These will rise over the next few years from a minimum of 5% of your qualifying earnings now, to 8% from April 2019 onwards.
What are the charges with People’s Pension?
People’s Pension levies a fixed annual management charge of 0.5% which applies to each member’s pot.
So for every £1,000 in a member’s fund, the company will take £5 each year.
People’s Pension investment choices
There are three main investment choices with People’s Pension. If savers don’t express a preference, the money is put into the default ‘balanced’ investment profile.
This profile is one of three on offer which bring together groups of investments with different levels of risk – ‘cautious’, ‘balanced’ and ‘adventurous’.
More proactive investors can choose from a range of eight investment funds (Ethical, Shariah, three levels of Global Investments, Pre-Retirement, Annuity and Cash).
Again, each has a different level of risk and savers can decide how much money to put into each fund.