Pension auto-enrolment: What you need to know

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At some point in the last decade, you’re likely to have been enrolled in a workplace pension scheme – without you having to ask. This October marks the 10-year anniversary of auto-enrolment, so we’re talking about its benefits and looking at some things to consider.

10 years on from auto-enrolment’s introduction, we’re answering some key questions and talking about how auto-enrolment might affect you.

What is pension auto-enrolment?

Auto-enrolment was launched by the UK government to help more people save for retirement. Under this system, employers have to automatically enrol their eligible workers in a workplace pension scheme and pay into it on their behalf.

How auto-enrolment works

Provided you meet the criteria, you don’t need to ask your employer if you can join their workplace pension scheme; they should just go ahead and enrol you. If you decide you don’t want to be part of it, you can opt out. Once you’re in the scheme, you and your employer will both pay into your pension plan. There are minimum amounts for you and your employer to pay into the scheme. You can both put in more than the minimum, but we’ll talk about that more later. 

Every three years, employers have a duty to re-enrol certain eligible workers. So if you opt out or pay in less than the minimum level, your employer should eventually enrol you again. If you still don’t want to pay into your workplace pension, you’ll have to opt out again.

What are the qualifying criteria for auto-enrolment?

You’re eligible for auto-enrolment if:

• You work in the UK,
• You earn £10,000 or more a year,
• You’re between 22 years old and State Pension age.

If you don’t meet the criteria, there’s a good chance you’ll still be able to get a workplace pension. For example, if you earn less than £10,000 but more than £6,240, you could join a workplace pension scheme and have your employer pay into it – but you’d have to ask first. The same applies if, say, you’re only 20 years old.

If you earn less than £6,240 a year, you can still ask to be part of a pension scheme, but your employer won’t have to pay anything in. 

For more information about eligibility, you can visit GOV.UK.

What are the minimum payments for auto-enrolment?

In most cases, you and your employer will make payments based on anything you earn above £6,240 but below £50,270. At a minimum, your employer usually needs to pay in 3% of these earnings, while your minimum payment is normally 5% – so a total of 8%.

The benefits of auto-enrolment

Millions of people are saving money

In April 2021, the workplace pension participation rate in the UK was 79%, while it was less than 50% in 2012. Auto-enrolment has caused a big increase in the number of people saving into workplace pensions, with more than 10 million people having been automatically enrolled.

People are living longer, so they need more savings to fund their retirement than they would’ve done previously. Plus, the current full State Pension is less than £10,000 a year, which is likely to fall short of many people’s retirement goals. Thanks to auto-enrolment, though, millions of workers are now saving for their future.

Remember, a pension is an investment and its value can go down as well as up and may be worth less than was paid in.

It’s easy

Auto-enrolment is considered an easy way of paying into a pension. Since your employer does most of the work for you, you don’t have to spend time shopping around for a pension plan. The money should just come out of your salary, and you’ll probably find there’s not a lot you have to do throughout the process.

Your employer pays in too

Your employer pays into your pension plan under this system, which can help to grow your pension pot.  Some employers will pay more than the 3% minimum, and others may be willing to put in more if you do – that is, they’ll match your payments. It’s worth asking your employer about this, as it can really give your savings a boost.

You can get tax benefits

There are normally tax benefits for people in workplace pension schemes. But not all pension schemes give you tax benefits in the way the table below shows. For example, some employers offer tax benefits through salary sacrifice or exchange schemes. So check with your employer if you’re not sure how this works for you.

In other workplace pension schemes, the government will add money to your workplace pension in the form of tax relief.  Usually, how much tax relief you get depends on the amount of income tax you pay. If you pay the current basic income tax rate of 20%, this’ll also be the rate of your tax relief. In this case, if you paid £100 of your salary into your pension plan, you’d actually only be putting in £80. The government would pay the additional £20 in (this is what it otherwise would’ve taken from your £100 in income tax). You can see how this works below.

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So when you’re enrolled in a workplace pension, there’s every chance your payments actually cost less than you think. You can check out our article for more information on how pension tax relief works.

Some things to consider

Not everyone qualifies

Lots of people don’t meet the criteria for auto-enrolment. This means they either miss out on an opportunity to save money, or they have to spend time opting in. For example, auto-enrolment may not be going far enough to help young members of the workforce save money. The ONS reported that, in April 2021, around 8 in 10 eligible employees had a workplace pension, compared with just 2 in 10 employees aged between 16 and 21.
 
As we mentioned, people who earn less than £10,000 aren’t automatically enrolled into workplace pension schemes. And those earning less than £6,240 don’t qualify to have their employer pay in. This is particularly likely to impact people in part-time work. Self-employed people also aren’t eligible for auto-enrolment in a workplace pension and may have to look into other options.

The payment amounts may not suit everyone

Your employer should tell you how much you’ll be paying in to your workplace pension. However, you might feel that amount isn’t suitable for you.

For example, if you pay in the minimum of 5%, you may feel as though that figure’s too low. In that case, you’d have to take action to make sure your payments match up with your retirement goals. So it’s worth keeping an eye on your payments and considering adjusting them to suit your needs.

You could have many pension pots to keep track of

If you’re enrolled in a pension scheme in every job you have over the years, you might find yourself with a lot of pension pots. After all, it’s estimated that the average person changes jobs every five years. It can be easy to forget about some of these pots when you switch jobs, so you need to be careful not to lose track of your pension savings. You might be more likely to lose track of pension pots if you don’t keep your contact details up to date, as this could mean past providers can’t get in touch with you.

Combining your pension plans involves bringing all or some of them together in one pot. Having several plans in one pot could help you keep track of your pension savings.

If you’ve changed jobs in the past ten years, you’re likely to have some workplace pensions that your previous employers are no longer paying into. Combining your pensions may be something you want to think about, but it’s important to do your research first. Keep in mind that transferring isn’t right for everyone. You can read about the pros and cons of combining pensions in our article. You can also visit our website to read more about transferring pension plans to Standard Life.

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Tax rules and legislation may change and your individual circumstances and where you live in the UK will have an impact on the tax you pay.

The information here is based on our understanding in October 2022 and should not be taken as financial advice.

Standard Life accepts no responsibility for information in external websites. These are provided for general information.