What is pension auto-enrolment?
The new changes to the workplace pension system explained
For the millions automatically enrolled into a workplace pension, the amount you must pay in is going up in April. But what your employer has to contribute is increasing too – meaning a hidden pay rise for many, though you'll also be shelling out more.
Signing up to the pension auto-enrolment scheme is automatic (hence the name), but you can opt out if you choose. Here's the lowdown on how it works.
This is the latest incarnation of this guide. Please suggest any changes or questions in the Auto-Enrolment discussion.
In this guide
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Auto-enrolment – the big questions
Put simply, it's an opportunity to boost your pension savings through your pay packet in a workplace pension scheme – with the added bonus of your employer and the Government making contributions.
You won't be able to access this pension pot until you are at least 55 years old. Until then, a pension provider will hold it for you.
Auto-enrolment is a radical departure to the way things normally work. This Government scheme began in 2012 and is 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.
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 that you have to pay in has previously risen and this spring sees the latest increase. Currently, enrolment is automatic for people aged 22 or over earning a minimum of £10,000 from a single job.
We saw increases on 6 April 2018 and this year's are going to be even bigger. There are two main changes coming in for the 2019/20 tax year, which starts on 6 April...
– The minimum your employer has to contribute is to increase from 2% of your salary to 3% (so £100 extra a year per £10,000 of salary).
– The minimum total auto-enrolment contribution is to rise to 8% (that's the total that you and your employer together must put in).
So if your employer is only putting in the minimum 3%, your contribution will automatically rise to 5% to meet the maximum total (so a £200 per £10,000 increase), without you doing anything.
If it is putting in more than the minimum, your contribution will not have to rise by as much to meet the total (eg, if it puts in 4% yours will only rise to 4%).
However, your contribution is from your pre-tax salary so it actually costs you less than it sounds.
The table below shows the minimum contributions you, the Government and your employer must make and how they have changed over time.
Bear in mind that the amount paid isn't based on everything you earn. It's actually a percentage of what's called your 'qualifying earnings'.
This is pre-tax employment income between the Government's 'lower earnings limit' (going up to £6,136 in April 2019) and the higher-rate income tax threshold (£43,431 in Scotland or £50,000 elsewhere in the UK for 2019/20). So from April, if you earn £25,000, at least £1,509 will automatically be pumped into your work pension.
L 6 Apr 2019 onwards 4% 1% 3% 8% 6 Apr 2018 - 5 Apr 2019 2.4% 0.6% 2% 5% Before 6 Apr 2018 0.8% 0.2% 1% 2%
There is a chance your employer already has a much more generous pension scheme, in which case these minimums are irrelevant and you may not see a change.
Also bear in mind that your employer can increase the amount that it and you contribute above the minimum 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.
Some of the extra you'll pay into your auto-enrolled pension will be offset by the national insurance and income tax changes coming in from 6 April. Overall these changes mean an extra £155 a year in your pocket if you earn between £12,500 and £50,000, and £566 more if you earn between £50,000 and £100,000.
For more on the income tax changes, including how the thresholds are changing for taxpayers in Scotland, see our Tax Rates guide.
You also automatically get tax relief from the Government on basic rate earnings 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 taxpayers need to save £60 to get £100, and top-rate taxpayers £55.
So with auto-enrolment, if you were on £25,000 a year from April, your 4% contribution (as the table above shows) will mean you'll put in £1,000, you'll get £250 in tax relief plus £750 from your employer so you'll double your money.
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 HM Revenue & Customs (HMRC).
How it's different from 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.
Your employer may put some or all of their NI savings in.
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.
For further guidance, you can try the helpline at the Government's Pensions Advisory Service.
You might already have been enrolled, but if not, you will be if you're between 22 and state pension age (set to be 66 years for men and women from 2019), earn more than £10,000 (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).
However, the Government is considering plans to extend auto-enrolment to 18 to 21-year-olds to get younger people to start saving for their pensions. But if it happens, it won't come into effect until 2020.
In addition, at the moment you have to earn a minimum of £6,032/year (going up to £6,136 from April) in a job to qualify for an auto-enrolment scheme. Your employer doesn't have to enrol you automatically but it can't refuse you and must make its contributions.
However, under the new proposals the 'lower earnings limit' might be removed, meaning people would contribute to their pensions from the first pound they earned. This would make people who earned below this amount eligible for employer contributions if they chose to opt into their workplace scheme.
Removing the earnings limit would also mean people with multiple jobs, who earn below £6,136 in 2019/20 in any of their employments, could opt in and be entitled to employer contributions automatically. We'll update this guide if reforms come in.
All employers have to offer a workplace pension to eligible workers. Most employers should have signed up to the scheme by April 2017. But there's a way to find out if your employer auto-enrolled you.
Look on your payslip and there'll be a string of letters and numbers that represent your employer's pay-as-you-earn (PAYE) reference – looking something like this: 123/AB1234A. Punch your number into this calculator to find the exact date your employer introduced auto-enrolment.
No. But you'll be automatically opted in, which means you have to opt out if you don't want to take part.
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 – you just 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 – but as above, you won't be able to access the cash until you hit retirement age.
Even if you do opt out, if you remain at your current place of work for three years or you move jobs, you'll be automatically enrolled again. So you'd have to opt out again if you don't want to join.
Who won't be automatically enrolled?
Your employer usually doesn't have to enrol you automatically 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 it's 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 employer's auto-enrolment start date, you left ('opted out' of) a pension arranged through your employer.
- You're from another European Union 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 its pension scheme if you want to. Your employer can't refuse.
Good question. 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.
However, there are some circumstances where opting out or reducing contributions, if your firm allows it, does make sense, including…
– If you've very expensive debts, eg, payday loans or bank charges for busting your overdraft limit. Here it's likely worth clearing these before you start to contribute to your pension. Then opt back in to auto-enrolment afterwards.
– If you're near retirement and have little savings. There is a chance that having a bigger pension pot could reduce your benefits, but this is a rare scenario, so you can use our 10-minute benefit checker or speak to Citizens Advice to find out.
– If you already have a pension, especially if it's a large one, there is a risk auto-enrolment will put you over the lifetime allowance, which is currently £1.03 million, expected to rise to £1.05 million in April. If you already have this or other complex pension arrangements, it's worth speaking to your independent financial adviser. If you don't have one, speak to Pension Wise.
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.
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 from your colleagues who are being auto-enrolled (however, more often than not it will be the same scheme).
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.
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.
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 Lifetime ISA question below for more.
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.
Not at all – you can get both. Auto-enrolment is the equivalent of a pay rise – not something you'd throw away lightly. Lifetime ISAs, available if you're aged between 18 and 39 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 read more in our Lifetime ISAs guide.
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