We all know it’s important to save for the future, but it can be difficult to motivate yourself to do this. Retirement can feel so far away that it seems unimportant right now, but you don’t want to end up struggling financially when you reach that age. That’s why the government brought in auto enrolment to encourage more people to save towards their pensions.
Automatic enrolment is a workplace pension initiative that was introduced in 2012. It was first rolled out to large companies and should have been in place in all companies across the UK by 2017. To comply with auto enrolment, employers must enrol all of their eligible employees into a workplace pension scheme and make contributions towards their pensions.
Since employees no longer have to take action to set up a pension scheme, auto enrolment is helping to increase the number of people who are doing so. By 2018, this initiative had encouraged lots more employees to contribute towards their pension, rising from less than 47% in 2012 to 73% in 2018.
Amazingly, NEST pensions now controls funds of over £10 billion on behalf of our nation's savers.
Not everyone is eligible for auto enrolment. To qualify, your employees must meet the following criteria:
- Be employed and work in the UK.
- Between the ages of 22 and state pension age. Earning at least £10,000 per year.
These criteria exclude the self-employed and sole traders. It’s also worth noting that the £10,000 per year qualification must come only from one job. For example, someone with two part-time jobs and earning £6,000 per annum from each won’t be eligible for auto enrolment from either employer. Someone earning £10,000 from one employer and £5,000 from another would only be eligible for auto enrolment with the first employer.
Who contributes to the pension?
A big incentive of auto enrolment for employees is that they get contributions from both their employer and the government. As of 6th April 2019, you must contribute at least 3% of your employee’s annual income into their pension scheme, the employee must contribute at least 4%, and the government must contribute at least 1%. That’s a minimum total contribution of 8% per year.
Here’s an overview of how these minimum contributions have changed since auto enrolment was introduced: See what MoneySavingExpert has to say.
The percentage is calculated based on qualifying earnings. This means employees will only be taxed on income over the lower earnings limit. Check the latest limits on the Pension Regulator's Website. The amount employees contribute will come out of their wage, while your contribution and that from the government will be added on top.
Your employees’ options
All eligible employees will be automatically enrolled into the workplace pension scheme as long as they are not already part of one. However, they still have the option to opt out at any point. Employees may opt out for financial reasons; if their current income does not cover their living expenses, for example. If they remain opted out for three years without changing employment, you must re-enrol them, at which point they would have to opt out again should they choose.
If an employee opts out after contributions have already been made into their pension pot, that money will remain there until it is accessible at retirement age. The employee can not withdraw the money already paid in.
Your role as an employer
If you have employees, you should already have auto-enrolled them in line with the staging date provided to you between 2012 and 2017. You must then enrol any new employee you onboard. For business owners who are planning on hiring their first members of staff, it is important that you enroll each eligible employee in a pension scheme unless the employee has chosen voluntarily to opt-out.
If you fail to comply with auto enrolment as an employer, you are likely to receive a warning initially, giving you a chance to comply. Beyond this, you could be subject to penalties and fines from the government.
If you have any questions about auto enrolment and your duties as an employer you should check the Pensions Regulator Website