Auto-enrolment is designed to encourage everyone in work to save for their retirement. Since it was introduced in 2012, the proportion of employees with a workplace pension has rocketed from 55% to a huge 87% in 2019.
The scheme was introduced to encourage retirement planning. The idea is to reduce the future burden of older people on the state, provide tax breaks for every employee, and promote long-term financial planning habits.
But what is it, how does it work – and can you (or should you) opt out of it?
Here’s your guide to auto-enrolment for workplace pensions.
- What is auto-enrolment?
- Does it apply to all companies?
- Why should I join my employer’s pension scheme?
- How does this affect men and women?
- I’m an employee – how much will I have to pay?
- I’m an employer – what will I have to pay?
- Can I opt out?
- Will joining a workplace pension scheme mean I receive fewer benefits when I retire?
- I’m not happy that my employer puts in 3% while I put in 5%, what can I do?
- Can I transfer a previous workplace pension to my new job?
Employers have to automatically enrol every eligible employee into a workplace pension. That includes making a certain level of contributions towards the pension pot – and the employee must also make a minimum contribution each month, too.
The money for a workplace pension is taken off your pay before you’re taxed. That means you get more money saved than if you’d waited to get paid and put the cash into a savings account. The Government also tops up the employer and employee contributions, so you get an extra bonus in your pension pot.
There are rules about who is an eligible worker. These rules may change in the future, as current criticism demonstrates that low-paid and part-time workers miss out on the scheme. This means a disproportionate amount of women aren’t eligible. Women make up the largest number of part-time workers – and often work for more than one employer (without reaching the earnings threshold for either).
Employees over the age of 22 (and not at or over the State Pension age), earning more than £10,000 per year are eligible.
If you’re working beyond State Pension age you can stay in your workplace pension scheme. If you’re between 66 and 74 you can choose to opt-in – you won’t be automatically enrolled. Over the age of 74, you could opt in but you won’t get the tax benefits.
The law phased in over a few years – but now every single employer must offer a workplace pension. That includes Limited businesses owned by one person that employs just one other worker: if the single member of staff meets eligibility requirements, they must receive a pension scheme.
It’s illegal for any company to discourage you from taking your workplace pension. You can choose to opt out of the scheme yourself – within one month of enrolment – but your employer mustn’t coerce you into it.
This includes telling you things like, “Oh, but you’ll get paid less each month”. Yes, you’ll have less take-home pay – but your pre-tax pension savings, combined with the employer contribution and the Government top-up, leaves you more cash in the bank for your retirement.
Here at MoneyMagpie, we’re pretty clear about our thoughts on company pensions. We say if your employer offers it, grab it! This is for two reasons.
Firstly, whatever money you put into the scheme will usually be matched or exceeded by your employer. If you earn £20,000, for example, you have to put in 5% of your salary, with your employer putting in another 3%. A 3% cut of £20,000 is £600, so if you don’t take advantage of the scheme, you’re basically throwing away £600 a year!
Secondly, your employer will usually deduct your pension contributions from your salary before deducting tax (but not before deducting national insurance). This means that some of the money you put into your pension is money you would have lost to tax anyway.
Sticking with the above example, although you would have to pay £1,000 a year, you’d only pay tax on £19,000 of your salary (ignoring National Insurance for now).
Are there downsides to a company pension?
Of course, company pensions are not foolproof. If the pensions company your employer works with invests badly, you could still lose your money. And, when it comes to public sector pensions, these are at the mercy of the Government – which could change the rules at any point.
Yet we still say that on the whole, they’re a good thing. Using the above example, if the value of your investment dropped by a third, you’d still only be losing the money your employer put in for you, not your own cash.
Women traditionally don’t contribute as much as men towards their pension – just as they don’t typically save as much as men, either.
For the first time ever, in 2019, an equal number of women and men had a workplace pension. That’s a phenomenal step towards closing the gender gap when it comes to retirement savings.
However, there’s still a long way to go! This is especially important when you realise the equal numbers of men and women having a pension doesn’t mean they’re saving the same amount.
The savings gender gap is caused for a few reasons:
- Women are more likely to be part-time and ineligible for workplace pensions
- Women typically earn on average 9% less than men
- Men have a less risk-averse attitude to investing
- Women tend to be primary care-givers for children and the elderly (affecting earnings and savings potential)
A lack of financial education is also at fault. A recent survey by the Pensions and Life Savings Association revealed 37% think the minimum contributions of auto-enrolment will be enough for their retirement. It’s definitely not!
You MUST pay a minimum of 5% of your eligible earnings into your pension pot. You can choose to pay in a larger contribution if you want to save for a comfortable retirement. Your employer doesn’t have to match your increased contributions – although some will choose to.
You’ll have to pay 3% of your employee’s gross salary. You pay this directly to your auto-enrolment pension scheme as a deduction from your employee’s gross pay.
If you’re a new business and need to find a pension scheme for your staff, speak to an independent business financial adviser. You can also find plenty of interactive tools online to find the best scheme to suit your business and your staff.
Yes, but you have to be quick.
You have one month from your auto-enrolment to opt out. You have to first wait for the enrolment to take place before you can opt out. If you do this in the first 30 days after your first payment to the scheme, this will be refunded in full.
Your employer must automatically enrol you into the scheme every 3 years – it’s the law. You’ll get a letter telling you when this happens – so make sure you opt out again if you still don’t want to contribute.
Opting out doesn’t change your entitlement to the pension. If you decide at a later date that you want to start saving for your retirement, let your employer know. Contributions automatically go out from your next pay cheque into your reactivated pension account.
People opt out for a variety of reasons. Low earners, for example, may simply not have the cash to spare. Others already have personal pensions they pay into – but by opting out, they won’t get the benefit of employer contributions.
We’ve said it before and we’ll hammer it home again: the State Pension is not enough for anybody to live on. You MUST have other retirement savings plans!
How much National Insurance you’ve paid over your career determines how much you’ll receive for the State Pension. So, if you’ve taken time out of work to study, for example, or for ill health – you might not get the full pension allowance.
A workplace pension scheme bolsters your retirement income significantly. Even if you’re still in your early 20s a tenner a month into a pension quickly adds up. Thanks to compound interest, by the time you get to retirement this means you’ll have a nice nest-egg to live off.
That’s even more important to know when you consider the insecurity of the State Pension. Who knows what the retirement age will eventually rise to? It’s set to go up to 68 in coming years – but this could rise yet again. Perhaps it’ll be abolished altogether – we simply can’t predict that far into the future.
Benefits may be affected – but not your State Pension
A workplace pension scheme may affect your state BENEFITS when you retire, but not your State Pension. For example, if you buy an annuity to receive a regular income from your pension at retirement, this may exceed the annual qualifying income to receive help from Universal Credit, Attendance Allowance, or other benefits.
The 25% tax-free lump sum you can take on retirement from your pension can also affect your eligibility for benefits. If you have over £16,000 in savings, or another property you don’t reside in, this disqualifies you from means-tested benefits.
So, if you take the lump sum and either put it in your savings, or use it to buy a second property as an investment, this could affect your entitlement to state benefits. You will, however, still get your State Pension payment.
Auto-enrolment legislation requires employees to put 5% of their salary into the company pension, with employers adding a further 3%. This is partly because big companies lobbied the government while they were making the law. They said the auto-enrolment scheme would be expensive to put into place, that it could put small companies out of business, and that jobs might be lost as a result.
However, there’s no reason that individual employees shouldn’t push for higher contributions from their employers. When you’re looking for a new job, always take a close look at the pension offered with the job, not just the final salary. Many companies will put in more than the minimum 3%. Bear this in mind when deciding which jobs to pursue!
You can use it as a bargaining tool for a pay rise, too. If you’re not getting the recognition you want in your current job, ask for a higher contribution from your employer.
As ever, make sure you read the small print when you sign up to a company pension scheme. Many pension management companies charge fees. These should be absorbed by your employer, but it’s worth checking this for yourself.
Many people have more than one workplace pension as they move jobs through their career. You might even have forgotten about some! Use the Pension Tracing service to find your lost pension pots.
If your pension provider is the same as your previous employer you can fill out paperwork to update your records. Then, you’ll have the same pension pot as before.
But if you don’t already have a pension with your new workplace scheme, they’ll set a new one up for you through auto-enrolment. You can choose to transfer your previous pension to your new pension pot, if you wish.
However, think long and hard about this. Spreading the risk – having more than one pension plan – is a good idea to protect your retirement investments. However, if your current pension provider costs you a lot in management fees, it could be worthwhile consolidating your pot with your new workplace pension scheme.
For more information about pensions, check out our other pension and retirement guides. You can also visit the Pensions Advisory Service for free and impartial advice about pension and retirement planning.