Pensions And Auto-Enrolment. What Does It All Mean?
New rules for workplace pensions were introduced in the UK by The Pensions Act 2008. These rules meant that every employer had to give their employees the opportunity to join a workplace pension scheme.
From October 2012, automatic enrolment into a pension scheme was rolled out, starting with larger employers. All eligible employees should have been automatically enrolled by 1 February 2018.
The changes were made because too few people were saving enough for retirement and only relying on the State Pension to see them through later life.
The main benefits of automatic enrolment are that it makes joining a pension scheme very simple, and because you employer has to make contributions schemes may be more financially attractive than they were in the past, particularly in smaller companies where employers may not have contributed at all.
The minimum total contributions to be paid into your pension scheme under auto-enrolment are set by the government and have increased in the last couple of years.
The contributions are based on your qualifying earnings which are a proportion of your total pay. This includes your salary as well as any overtime, bonus and commission payments, and statutory pay such as sick pay or maternity pay. For the 2019/20 tax year your qualifying earnings are everything between £6,136 and £50.000. The band for qualifying earnings will be reviewed by the government each year.
Am I eligible?
The law states that all employers must automatically enrol their employees into a workplace pension scheme if they:
- Are aged between 22 and the State Pension Age.
- Earn more than the minimum threshold which is currently set at £10,000 a year.
- Work in the UK.
- Are not already a member of a qualifying work pension scheme.
If you earn less than £10,000 a year or you are below age 22 or above State Pension Age then you are what’s known as a non-eligible job holder. This means that you will not be automatically enrolled into your workplace pension. You can, however, ask to be enrolled and you are entitled to employer contributions.
If you earn less than £6,136 a year then you can also ask to be enrolled, but you are not entitled to employer contributions.
Basic rate tax payer:
David earns £25,000 a year. He is entitled to pension contributions on £18,864 of his earnings.
His employer will contribute 3%, he will contribute 4% and the government will add a further 1% in the form of tax relief. His total pension contributions are as follows:
Employer – £965.92 or £47.16 a month
David – £754.56 or £62.88 a month
Government – £188.64 or £15.72 a month
Total – £1,509.12 or £125.76 a month.
Because pension contributions come out of gross pay he would not see the government contribution on her payslip.
Higher rate tax payer:
Nikki earns £65,000 a year.
She is entitled to pension contributions on £43,864 of her earnings.
Her employer will contribute 3% of this figure and she will contribute 5%. Because she is a higher rate tax payer that will include 2% from the government in the form of tax relief. Her total pension contributions are as follows:
Employer – £1,315.92 or £109.66 a month
Nikki – £1,315.92 or £109.66 a month
Government – £877.28 or £73.11 a month
Total – £3,509.12 or £292.43 a month.
You can of course contribute more to your pension or choose to contribute a per centage based on your full salary rather than the qualifying earnings band. However, the minimum contributions made by your employer will remain the same, unless they also choose to pay more into your scheme. And with higher contributions the amount you get from tax relief will also increase.
You can find out more about how tax relief on pension contributions works here.
Can I opt out?
Yes, you can opt out of auto-enrolment. But remember, you will be missing out not only on the contributions your employer makes into the scheme, but also on the ‘free’ money the government gives you in tax relief.
Although you may opt out by choice your employer must not put any pressure on you or encourage you to opt out. This is known as ‘inducement’ and there are penalties for employers who advise staff to opt out or treat them unfairly because they have chosen not to opt out. This also applies at the recruitment process; employers are not allowed to not hire somebody because they think they won’t opt out of their pension scheme.
If you do choose to opt out you would also not be eligible for any benefits that your pension scheme may pay if you are unable to work because you fall ill. And if your scheme has a death in service benefit attached to it then your dependents would not receive any payments if you were to die during your employment. This is not something that most people like to think about, but it is a good alternative to life insurance, particularly when you are young and may not have much spare cash to pay into an insurance policy.
After 3 years or if you change jobs you will automatically be enrolled again. And you can ask your employer at any time to rejoin the scheme.