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Auto-enrolment is a government initiative to get more people saving for retirement. The idea is that if an employer automatically signs up eligible workers to a pension rather than hoping individuals do it themselves, more of us will be better off when we retire.
What is auto-enrolment?
Every employer is required to provide a workplace pension, which all eligible employees are automatically enrolled into. This means when someone joins a company – provided they meet the qualifying criteria – they must be signed up to the workplace pension. They have the option to ‘opt out’ and effectively leave the scheme, either immediately or at any time in the future.
But if they remain opted in, some of their salary must be automatically deducted and paid into their pension each month. Employers must also pay into the pension, and pension tax relief from the government is added too.
Who is eligible for auto-enrolment?
To qualify for auto-enrolment an employee has to meet certain criteria. They must:
- be aged between 22 and state pension age
- earn more than £10,000 from that job
- work in the UK
Employees aged 16 to 21, or between state pension age and 74, don’t need to be auto-enrolled but can request to join a workplace pension voluntarily. If they earn more than £6,240 a year, an employer must also contribute to their pension. If they earn less than £6,240, employers aren’t obliged to contribute, but can if they wish.
Auto-enrolment contributions
Under auto-enrolment rules there is a minimum amount that employees and employers must pay into the workplace pension of qualifying workers.
An employee usually has to make a minimum contribution under auto enrolment of 5% of their wages, which includes tax relief. Employer auto enrolment contributions must equate to at least 3% of an employee’s earnings.
It is important to note that minimum contribution amounts only apply to ‘qualifying earnings’. This is any pre-tax employment income of between £6,240 and £50,270. However, some employers choose to base contributions on an employee’s whole salary.
Opting out of auto-enrolment
Employees can decide to leave a workplace pension scheme they’ve been automatically enrolled into or voluntarily joined at any time. This is known as ‘opting out’.
If an employee opts out within one month of being auto-enrolled, any contributions you made to the pension can be refunded. If opting out later, the money that has already been paid into the pension usually stays there until they retire.
Employers are not allowed to encourage or induce an employee to opt out of a workplace pension.
Eligible employees must also be allowed to opt back into a workplace pension if more than 12 months have passed since they opted out.
Finding an auto-enrolment pension provider
If you’re a business owner who needs to automatically enrol workers into a pension scheme, you’ll need a workplace pension provider. A selection of providers that may be willing to work with smaller businesses is listed on The Pensions Regulator website.
These include a government-backed workplace pension scheme, the National Employment Savings Trust (NEST). Alternatively, an accountant or financial adviser may be able to help you find a suitable scheme.
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