What is pension auto-enrolment?
The latest changes to the workplace pension system explained
For the millions automatically enrolled into a workplace pension, the amount you must pay in has gone up from 6 April 2019. But what your employer has to contribute increases 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 retirement savings using a workplace pension scheme – with the added bonus of your employer and the Government also putting in money.
You won't be able to access this pension pot until you are at least 55 years old. Until then, a pension company or scheme 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. If you don't want to contribute, you have to opt out. .
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.
By February 2019 this push economics had led 10 million workers into auto-enrolment and fewer than 10% of those eligible had opted out. However, there are still more than nine million workers not in any workplace pension.
The Government is considering ways to get more people into auto-enrolment including lowering the qualifying age to 18, starting contributions from the first £1 earned and bringing the self-employed into auto-enrolment.
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 for contributions has also increased from 6 April 2019. Currently, enrolment is automatic for people aged 22 or over earning a minimum of £10,000 from a single job.
The changes for the 2019/20 tax year are: ..
– From 6 April, the minimum your employer has to contribute has increased from 2% of your salary to 3% (so £100 extra a year per £10,000 of salary).
– The minimum total auto-enrolment contribution has risen 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 (a £200 per £10,000 increase), without you doing anything.
If your employer 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 (via tax relief) and your employer must make and how they have changed over time.
Importantly, too, contributions are based on a band of what are called 'qualifying earnings'.
This is the band of pre-tax employment income between £6,136 and £50,000 (in 2019/20).
So, if you earn £25,000, a combined minimum of £1,509 (£25,000 - £6,136 x 8%) will automatically be pumped into your workplace pension.
If you earn £50,000, the total will be £3,509 (£50,000 - £6,136 x 8%), of which £1,316 comes from your employer. But if you earn say £55,000, the 8% is still based only on earnings between £6,136 and £50,000, so the total contribution remains at £3,509.
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 set higher contribution rates than the auto-enrolment minimum, so you could end up paying more. 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.
The extra you'll pay into your auto-enrolled pension from April 2019 will be offset to varying degrees by the changes to national insurance and income tax for 2019/20.
You receive tax relief from the Government on your pension contributions.
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 adds £20 to your pension pot. Higher-rate taxpayers need to save £60 to get £100, and top-rate taxpayers £55.
With auto-enrolment, from April 2019 you contribute 4% of your qualifying earnings, the Government adds 1% tax relief and your employer tops this up with 3% - so in effect your net contribution is doubled. As an example, for someone earning £31,136, their contributions will be based on their qualifying earnings (£31,136 - £6,136) which are £25,000. That means their 4% is £1,000, the Government's 1% is £250 and their employer's 3% is worth £750 so that's £2,000 automatically popped in their pension pot.
Auto enrolment contributions are limited to your band of earnings between £6,136 and £50,000. But higher earners who normally pay 40% or 45% tax are entitled to these higher rates of tax relief on their contributions. .
Some firms will claim back tax relief for higher earners automatically, but 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 what can be called either 'salary sacrifice' or 'salary exchange'.
The bonus with salary sacrifice is that these pension contributions are made BEFORE your tax and your national insurance (NI) are taken off. The Government will then give you all these savings.
Your employer may also 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.
For further guidance on choosing and paying into a pension, you can try the helpline at the Government's Pensions Advisory Service.
Auto-enrolment covers people between 22 years old and state pension age (currently going up to to 66 years for men and women), who earn more than £10,000 (from one job) and work in the UK.
There are exclusions such as if you're self-employed or you're a sole director company with no other staff.
If you earn less than £10,000 but more than £6,136, you can also ask to join your employer's auto-enrolment pension. Your employer can't refuse and must also contribute.
The Government is also 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 the mid-2020s and no firm date has been set yet.
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 if, for example, you're having financial difficulties and need to maximise your take-home pay. You can opt out whenever you like – but as above, you won't be able to access the cash you've already contributed until you hit retirement age.
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 for most people it's worth having. However, with that pay rise comes a sacrifice, as you will have less in your pay packet at the end of each month.
However, 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.
That said, there are some circumstances where opting out (or reducing contributions if your firm allows it) does make sense, including…
– If you've got 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 low savings. There is a chance that having a bigger pension pot could reduce your benefits, but this is a rare scenario. You can use our 10-minute universal credit and benefit checker or speak to Citizens Advice to find out.
– If you already have a pension plan, especially if it's a valuable one, there is a risk auto-enrolment will put you over the lifetime allowance, which is £1,055,000 in 2019/20. 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 the Government's Pension Wise which offers guidance for over-50s on what to do with their pensions.
If you can afford to, then definitely consider it – especially if your employer will match the contribution you make, in which case it's effectively a pay rise.
However, weigh this up against any payments you're making into a private pension to determine how much you want and can afford.
No. Auto-enrolment is 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 in a workplace pension scheme you could be in a different scheme from your colleagues who are being auto-enrolled (although usually it will be the same scheme).
Your workplace pension belongs to you and it'll still be yours when you reach pensionable age. However, although you'll 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 necessarily mean you'll be excluded, eg, 'personal service workers' can be auto-enrolled. But who can be classified as such a worker is a subject of debate.
However, the self-employed can always start their own saving for retirement through a personal pension. They can also join NEST, the National Employment Savings Trust, a workplace pension scheme set up by the Government.
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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