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Auto-enrolment – a beginner’s guide

Posted: August 15, 2014

In the biggest shake-up of retirement saving in years, some of the largest firms in the UK have already started automatically enrolling their workers into a workplace pension. Medium-sized firms are just starting the process while smaller businesses are set to follow suit before 2018. With that in mind, here is our guide to what you need to know about auto-enrolment.

So what is it?

The government has introduced a new law designed to help people save more for their retirement. It requires all employers to enrol their workers into a workplace pension scheme if they’re not already in one.

How does it work?

This will mean that minimum contributions are taken directly from the employee’s wages each month and invested into a pension scheme. Employees then have to actively opt out.

Why is it happening?

People are living longer. Fifty years ago only one in 10 children could expect to live to be 100 years old – today that figure is one in four. We also have an ageing population – by 2020 half the UK population will be 50 or older – meaning fewer future taxpayers to bankroll a greater number of pensioners.

People have lost faith in pensions. Participation in pension schemes has been declining. The popularity of personal pensions has steadily fallen and even workplace pensions are being shunned. Official figures published earlier this year showed the proportion of people in company pensions had fallen below half for the first time in at least 15 years.

Will I be enrolled?

If you’re aged 22 or above (but under State Pension age), earn more than £8,105 a year (this figure may change at the beginning of each new tax year in April), and are not already in your employer’s pension scheme, you will be enrolled. Your employer will provide you with information beforehand.

When will this happen?

The timing of when employers will automatically enrol workers depends on their size. Very large employers – with 120,000 or more workers will be the first to do this, starting from 1 October 2012. Other employers will follow gradually, over a six-year period up until 1 February 2018. Companies with fewer than 50 workers, for example, will not begin the process until June 2015.

Do I have to stay in the pension scheme?

You can choose to opt out of the scheme if you want to, by informing whoever runs your employer’s pension scheme. Remember this is an active process – you will be enrolled unless you specifically request to opt out.

Is it worth it?

Today the full basic state pension is £107.45 a week for a single person. Relying solely on that would mean living with a significant fall in income when you retire, so if you want to continue living in relative comfort, you need to make other provisions.

What are the benefits?

Under the scheme, your employer will also make contributions to the pot – which is essentially free money for you. How much they contribute will vary from company to company, but it will be a minimum of 1 per cent.

How will it work?

They want to ease people into the scheme gently so in the first four years, minimum contributions as a percentage of earnings will be just 2 per cent, made up of 0.8 per cent from workers, 1 per cent from employers and 0.2 per cent coming from tax relief. All firms will eventually have to contribute at least 3 per cent of their employees’ salary, with workers contributing 4 per cent, and 1 per cent coming from tax relief, making 8 per cent in total.

Common concerns

If I move jobs, my money will be lost. The government has announced a new ‘pot follows member’ scheme for auto-enrolment and new pensions which will allow employees to simply switch their pension savings to their new employers pension scheme when they move jobs. However, this plan is yet to be finalised.

I’m too young to be worrying about a pension. It’s never too early to start saving – the younger you are when you start paying into a pension, the more money you will have set aside, and the longer it will have to grow.

I can’t afford to contribute. If your salary is on the lower end of the scale to be auto-enrolled, it’s important to remember that your contributions will be small. If you earn £12,000 a year you will initially contribute £4.29 a month, just over £1 a week. And remember, you will also be getting tax relief and employer contributions too, so it all adds up.

My company already has a pension scheme and I don’t take part. You will still be auto-enrolled into their workplace pension scheme, unless you actively choose to opt out when they write to you ahead of your enrolment.