Any employer that has at least one staff member has responsibilities for that employee, including enrolling them into a workplace pension scheme - it’s the law.

What’s great is that this enrolment is automatic.  The employee doesn’t have to lift a finger to be enrolled into the pension scheme.  However, the employer does.

Let’s look at the process in more detail.

What is auto-enrolment?

What is excellent news is that auto enrolment is the law.  It wasn’t so long ago that employers had no obligation to provide pensions for employees and, with the standard feeling amongst us being that pensions are scary/dull and to be put off to another day, the government rightly saw that people weren’t putting anywhere near enough aside for their retirement.  

It is a requirement that all employers (and you’re an employer if you have just one employee) establish and contribute to a pension for all eligible employees.  The employee will usually be required to contribute too, and usually they’ll secure a tax relief top up on these contributions.

Creating access to a workplace pension scheme, means that more employees than ever before are saving toward their retirement and not relying on the state pension alone.  This will create more choice in retirement, and hopefully allow us to maintain our lifestyles into our golden years.

Auto enrolment started in 2012, with larger employers embarking upon the process first and, by 2017, all new employers had to take responsibility for auto enrolment from day one. 

Now, auto enrolment should be on offer in all workplaces.

There are useful auto enrolment guides for employers on The Pensions Regulator website.

How do I qualify for auto-enrolment?

All employees that meet the following criteria will be auto enrolled into the workplace pension by their employer:

• if you’re between age 22 and State Pension age, 
• you work in the UK and 
• you earn more than £10,000 a year

The only slightly mysterious element here is the State Pension age.  To quote HMRC, “Your State Pension age is the earliest age you can start receiving your State Pension. It may be different to the age you can get a workplace or personal pension”.  HMRC provide a handy online tool to enable you to find out your specific state pension age via https://www.gov.uk/state-pension-age

It really is that straightforward.  If you don’t currently meet the criteria, you may do in the future when you have your birthday or if your earnings should change.

Once you meet the criteria and you are eligible, your employer is obliged to write to you and tell you:

• The date you were enrolled into the pension,
• What the pension is and which provider administers it,
• how much they will contribute towards your pension and also how much you will contribute,
• how you can leave (opt out) of the scheme if you choose to do so.

How much will I have to contribute?

We’ve established the circumstances under which your employer must enrol you into a pension, but how much do they, and as importantly, you, pay?  

Currently, the government guidelines on minimum contributions into a workplace pension are that you, as the employee, puts in 5% and, your employer puts in 3%, thus making a total contribution of 8%.

But what is this percentage based on exactly?  It is a percentage of your ‘qualifying earnings'.

Qualifying earnings incorporate your wages/salary, bonuses and commission, as well as other fundamentals, such as statutory pay.  Qualifying earnings are gross, so are considered before the deduction of tax or National Insurance.

This 8% combination of employer and employee contributions is the minimum amount required.  Your employer may pay more, meaning you as the employee could pay less to reach the 8% minimum.  Or, you may choose to pay more yourself.  Therefore, the amount you pay is directly linked to what your employer pays.

To clarify, in the current 2021/22 tax year, the total minimum contribution is 8%, of which, your employer must pay 3%. Alternatively, if your employer elected to pay the full 8% for you, then you would not have to pay anything (of course you could choose to pay more to boost your pot).

For the minimum 8% contribution level to be met, if your employer pays their minimum amount of 3%, then you must pay 5%.  This format is the most commonplace and we consider a 3% employer contribution as a positive thing.  

Your employer should tell you how much you will need to contribute. The Money Advice Service provides a free workplace pension contribution calculator to help work out how much you will have to contribute.

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Tax Relief on Contributions

Talking about these minimum contribution levels is all well and good, but let’s not forget about the all important tax relief that’s applied to your pension contributions.

We looked at this in other articles, but to reiterate, tax relief is additional money that the government applies to your pension. If the usual 'relief at source' format of tax relief is being used, the government will add an additional £20 to your pension for every £80 that you pay in.

If you are a higher rate taxpayer then when you do your self assessment tax return, you can claim any entitlement to higher rate tax relief.

For some workplace pensions, it is possible that your contributions are paid by ‘exchanging’ (sacrificing) part of your salary for a higher pension contribution than is required from your employer. This means you’ll save the tax and National Insurance contributions on this money as it’ll be going into your pension instead of being deemed as your earned income. 

Can I opt out of auto-enrolment?

We’ve seen how you’re automatically enrolled into a pension by your employer.  This just happens, it’s automatic and you won’t be offered a choice.  It’s like a club you’re joined to and you have to be through the doors before finding someone and asking if you can leave.  Fortunately, “opting out” of a pension isn’t so confrontational.  

From the date you are automatically enrolled into the pension, you have one month in which to choose to opt out and receive a refund of the contributions made (not your employer’s contribution, that’ll go back to them).

If you choose to opt out after that first month, the contributions already made will remain in the pot.  This is where people end up with even more small pension pots that can easily be forgotten about.  It’s also why Zippen is keen to try and check for pension pots for our user’s past employments, just in case there’s money sitting in a forgotten pot.  These pots belong to you, they’re in your name and they do not belong to your employer.

If you opt out, it is possible to request to join/rejoin the scheme at a later date, but this opportunity may be limited to once every 12 months.

Assuming you’re eligible, you will be automatically be re-enrolled into the pension every three years and, again, you will need to opt out if you don't want to be part of the scheme.

Where do the pension contributions go?

Great, you’ve started your new job and you’ve been enrolled in the pension, maybe on your three month-a-versary, maybe straight away, maybe sometime in between, but where are these contributions going?

Your employer would have selected a pension company to use and this is where the contributions are paid to and where they are invested.  Your employer will provide you with details of the pension company that has been chosen.  Additionally, you will also hear from this pension company/provider with details of the scheme, your plan number and maybe some online log in options.  Keep these details safe!  Contrary to popular belief, there isn’t currently a magic system where you enter your NI number and you find out where all your pensions are.

The chosen pension provider will invest your contributions for you, in a pot in your name.  Yes, the pot was set up by your employer and they pay into it, but it is absolutely yours.  Your employer doesn’t know the value of the pot, or your plan number, it is all private information unique to you.  Just as your employer pays your salary into your bank account each month and has no right to know your bank balance, the same security and privacy applies to your pension.

Growth within pensions is extremely tax efficient, but the value can go up or down due to the investment performance.   

Declare your compliance

It is our friends at The Pensions Regulator that ensure that employers have met their auto enrolment duties.  Employers report to The Pensions Regulator when they set up the scheme and also at re-enrolment.  

Employers are obliged to ensure that they keep up to date with who is eligible to be in the scheme (based on age and salary), they must ensure sound records are kept regarding scheme joiners and scheme leavers, and they must ensure that contributions are kept up to date.

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