Sam | Edited by Johanna
A major rule change means that, for many of you, if you're employed you're now likely to automatically contribute to a workplace pension - and your employer will have to put money in too.
Sign-up to the pension auto-enrolment scheme is automatic (hence the name), though you can opt-out if you choose. Here's our lowdown on how it works.
This is the first incarnation of this guide. Please suggest any changes or questions in the Auto-enrolment discussion.
In this guide
Auto-enrolment - the big questions
Put simply, this is your opportunity to start paying into a workplace pension scheme via your pay packet - with the added bonus of both your employer and the Government making contributions.
You won't be able to access this pension pot until at least age 55. Until then it'll be held for you by a pension provider.
Auto-enrolment is a rather radical departure to the way things normally work. It’s the first big UK test of the 'push economics theory' – which in a nutshell means you set up the system so people default to the correct action – in other words, the lazy or apathetic option is to contribute. You have to decide to do nothing (ie, not contribute).
Overall, we're a fan. We need to help people to help themselves, and inevitably most of us are guilty of decision-making focused on the now, not the future. Nowhere is that more important than when it comes to pensions. So any help to change behaviour is useful.
How much do I have to pay in?
First of all, it depends on how much you earn as you pay a percentage of your wage - so the more you earn, the more you pay in. The minimum percentage you'll have to pay is also rising over the next couple of years.
To help you out, here's a table showing you the amounts that will be deducted from your monthly pre-tax salary as well as the amount your employer will have to contribute as a minimum.
Your employer can increase the amount both it and you contribute above the mimimum level, so you could end up paying more than this. Your employer cannot however set the contribution rate so high that it acts as a deterrent for employees to contribute - if this happens it may get investigated by the Pensions Regulator.
Min contributions (as % of gross annual earnings)
|Until 5 Apr 2018||0.8%||0.2%||1%||2%|
|6 Apr 2018 - 5 Apr 2019||2.4%||0.6%||2%||5%|
|6 Apr 2019 onwards||4%||1%||3%||8%|
|Note: These dates are subject to parliamentary approval|
Is it just my employer and I that pay into it?
No. You also automatically get tax relief from the Government as an additional deposit into your pension pot.
In a nutshell, tax relief is essentially a refund of the tax you originally paid on cash put into your pension at your usual rate of income tax — 20%, 40% or 45%.
Put another way, to get £100 put into a pension, a basic-rate taxpayer needs only to pay in £80. This is because the taxman then hands back the £20 taken off which goes into your investment pot. Higher-rate tax payers need save £60 to get £100, and top-rate taxpayers £55.
Although some firms will claim back the tax relief for higher earners automatically, many won’t – which means you’ll have to claim the extra 20% or 25% via a self-assessment tax return. If you don’t normally fill in a tax return, call or write to HMRC.
So with auto-enrolment, if your 0.8% (as the table above shows) contribution meant you put in £80, you’d get £20 in tax relief plus £100 from your employer.
How it's different with salary sacrifice
Your employer may choose to pay your pension under 'salary sacrifice' in which pension contributions are actually made from your salary before any tax is taken off.
The bonus with salary sacrifice is that these contributions are made to your pension BEFORE tax and national insurance (NI) are taken off. The Government will then give you these savings.
So, a basic-rate taxpayer would get the usual 20% income tax plus 12% for NI contributions back. A higher-rate taxpayer would get 40% tax plus 2% NI contributions, while an additional-rate taxpayer would get 45% tax plus 2% NI.
If you want to get a general idea of how much you'll pay into any scheme over the next few years try this calculator from the Pensions Regulator.
Will I be enrolled?
You might already have been enrolled, but if not, you will be if you're between 22 and state pension age (currently 63 years for women, 65 for men), earn more than £10,000 (this has to be from one job) and work in the UK.
There are some exclusions such as if you're self-employed or you're a sole director company with no other staff.
If you don't qualify you won't be auto-enrolled, but you can still opt into a workplace pension scheme if your employer already has one and you're 21 (though your employer is not obliged to contribute as it is with auto-enrolment).
It doesn't look like I'm enrolled yet. Have I missed out?
Most employers should have signed up to the scheme by April 2017. But there's a way to find out if your employer should have rolled out auto-enrolment to you.
Look on your payslip and there'll be a string of letters and numbers that represent your employer's PAYE reference - looking something like this: 123/AB1234A. Input this number into this calculator to find the exact date your employer should roll out auto-enrolment to its employees.
If you have already been enrolled, you'll also see deductions for your pension contributions on your payslip.
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No. But you'll be automatically opted in which means you have to opt out if you don't want to take part in the scheme.
Who won't be automatically enrolled?
Your employer usually doesn’t have to automatically enrol you if you don’t meet the previous criteria or if any of the following apply:
- you’ve already given notice to your employer that you’re leaving your job, or they’ve given you notice
- you have evidence of your lifetime allowance protection (for example, a certificate from HMRC)
- you’ve already taken a pension arranged through your employer
- you get a one-off payment from a workplace pension scheme that’s closed (a ‘winding up lump sum’), and then leave and rejoin the same job within 12 months of getting the payment
- more than 12 months before your staging date, you left (‘opted out’) of a pension arranged through your employer
- you’re from another EU member state and are in a EU cross-border pension scheme
- you’re in a limited liability partnership
- you’re a director without an employment contract and employ at least one other person in your company
You can usually still join their pension if you want to. Your employer can’t refuse.
Also, unless you opt out within a month of joining you can’t get a refund of any money you’ve paid into a pension scheme. You won't lose this money, but you won't be able to access it until you reach retirement age.
Don't be afraid of opting out though if you're having financial difficulties or for other reasons. You can opt out whenever you like - however, you still won't be able to access any money you've already paid into your pension until retirement age.
Even if you do opt out, if you remain at your current place of work for three years, or you move jobs, then you'll be automatically enrolled again. So you'd have to opt out again if you don't want to join.
Why would I want to opt out though?
This is a good question to ask. Auto-enrolment is like a pay rise, so don’t throw it away. However, with that pay rise comes a sacrifice, as you will have less in your pay packet at the end of each month.
But instead of focusing on that short-term pain of the loss of salary, think of auto-enrolment as a long-term gain for your retirement.
Is it worth paying more than the minimum into the scheme?
If you can afford to then definitely consider it - especially if your employer will match the contribution you make, as it's an effective pay rise.
Do weigh this up against any payments you're making into a private pension to determine how much you want and can afford to be paying out of your pay packet each month.
What happens if I'm already paying into my company's pension scheme - will I end up having to pay into two pensions?
Quite simply: no. Auto-enrolment has been designed to get everyone who isn't already paying into a workplace pension scheme to do so.
What scheme you'll be signed up to is the decision of your employer which means if you're already on a workplace pension scheme you could be on a different scheme to your colleagues who are being auto-enrolled (however, more often than not it is the same scheme).
What happens to my pension if I change jobs?
Your workplace pension pot belongs to you and it'll still be yours when you reach pensionable age - however although you'll definitely be able to join a workplace pension scheme with your new employer, you won't necessarily be able to pay into your old pension scheme, or combine your old and new pension schemes. To find out you'll have to contact your pension provider.
I'm self-employed - why aren't I getting an automatic pension?
Auto-enrolment applies to those who are employed, but if you're self-employed, it doesn't mean you'll be excluded from auto-enrolment, ie for personal service workers (whose job can't be done by someone else due to the expertise). You can always start your own private scheme (see How do I get a pension?).
With auto-enrolment, it forces an employer to contribute, but if you're self-employed you have the right to give yourself whatever you want.
If you're under 40 there's another option open to you - see the below Lifetime ISA question for more.
What happens if my employer goes bust?
Any pension contributions you and your employer make will be held with the pension provider - not your employer. If your employer goes bust your pension fund will be ring-fenced which means it will be protected and you cannot lose it.
If your pension provider goes bust, you do have protection - see our pension need-to-knows for more information.
Quite simply no. Auto-enrolment is the equivalent of a payrise - not something you'd throw away lightly. Lifetime ISAs, available if you're under 40 when you apply, will allow you to save for retirement (accessing it at 60) and the state will add 25% on top - that's £1 for every £4 saved.
You can definitely get both - read all about it in our Lifetime ISAs guide.