If you’re not already in a company pension scheme, chances are your employer will sign you up later this year under a new system, auto-enrolment. We explain how it works.
What is pensions auto-enrolment?
At the moment, not all employers offer a pension scheme to their workforce. Those employees who don’t belong to a scheme run the risk of facing a ‘pension gap’ when they come to retire. To overcome this retirement savings deficit, the government will be signing all workers up to a company pension scheme from October 2012.
You are eligible for auto-enrolment if:
- you aren’t already in a workplace pension scheme
- you are at least 22 years old
- you earn more than £7,475 a year
- you work in the UK
- you are under State Pension Age (link)
When does auto-enrolment start?
Auto-enrolment will be introduced in stages from late 2012. Companies with more than 250 employees will enrol their staff first, in October 2012. Businesses with between 50 and 249 members will follow in 2014.
Firms with fewer than 30 members will start the process in 2016, later than originally intended after concerns were raised that smaller companies might struggle to meet the requirements within a shorter timescale. Everyone should be automatically enrolled by 2018.
How much will be paid into my pension pot?
Your pension pot will comprise contributions from you, your employer and in most cases the government, in the form of tax relief. Contributions will increase gradually, according to a set timetable.
The minimum total percentage required is set at 2% initially, rising to 5% by 2016 and 8% by 2017. Overtime and bonus payments are included in your earnings. The table below shows how contributions are set to rise, according to figures from the Money Advice Service.
|How much will be paid into my pension under auto-enrolment?|
|Date [a]||Total minimum contribution [b]||Minimum employer contribution [b]||Worker contribution [b] [c]||Government tax relief|
|October 2012 to September 2016||2%||1%||0.8%||0.2%|
|October 2016 to September 2017||5%||2%||2.4%||0.6%|
|October 2017 onwards||8%||3%||4%||1%|
- All dates are subject to change following government review.
- These minimums don’t apply to all of your salary, but on what you earn over a minimum amount (currently £5,0351) up to a maximum limit (currently £33,5401).
- In most cases you will need to contribute, but your employer can make contributions on your behalf. They could choose to pay the full 8% or even a higher level of contributions.
National Employment Savings Trust (Nest)
To facilitate auto-enrolment, the government has created a new defined-contribution pension scheme called Nest. You will be enrolled into Nest if your employer doesn’t have an existing pension scheme or decides not to use a pension scheme from a provider. Nest is designed for low-to-moderate earners.
Opting out of pensions auto-enrolment
You can opt out of auto-enrolment, but you won’t benefit from your employer’s contribution or from the tax relief. You’ll only be able to opt out after you’ve automatically become a member. If you want to opt out, you’ll need to ask the person who runs your pension scheme for an opt-out form.
If you opt out during the first month of your membership any payments you made into your pension during that time will be refunded to you. If you leave after the first month, your payments will remain in your pension pot. You can re-join at a later date.
Will the low-paid be excluded from auto-enrolment?
The current auto-enrolment earnings trigger is set at the same level as the personal tax-free allowance limit of £7,475 (for 2011/12). But this is set to rise to £8,105 in 2012-12, meaning that if the auto-enrolment minimum tracks it, 90,000 workers will be excluded.
Which? has called for the trigger to be set at the National Insurance primary threshold of £7,605, with the earnings band limit at £5,564 to make sure as many people are automatically enrolled as possible and have the opportunity to save for retirement.