Auto Enrolment or Workplace Pensions – An Employee’s Guide

To help people save more for their retirement, the government now requires employers to enrol their workers into a workplace pension scheme.

Why is this happening?

The government’s aim is for more people to have another income, on top of the State Pension, when they come to retire. The full basic State Pension in 2017-18 is £122.30 a week for a single person. This is intended to be a foundation only - you may want more.

Employers are enrolling their workers automatically into a scheme to make it easier for people to start saving.

When is this happening?

Your employer will be able to tell you their own specific “staging date”. This is the date from which auto enrolment will first affect you in relation to this employer.

Will Auto Enrolment affect me?

1. You will automatically be enrolled into a new employer pension scheme if you:

  • are not already in a qualifying workplace pension scheme;
  • are aged between 22 and the State Pension age;
  • earn more than £10,000 a year or £833 a month; and
  • work in the UK

Once you’re enrolled, not only will you pay in to it but so will your employer and you may also get tax relief from the Government.

You can however opt out if you wish so that you don’t pay any pension contributions. You are then treated as if you’d never joined the scheme and any contributions already made will be refunded to you. If you choose to opt out, your employer also won’t pay into your pension plan so you will be worse off in terms of providing for an income in your retirement. It is illegal for your employer to encourage you to opt out. If you wish to opt out, you need to do so before 70 days (6 weeks plus one month) from your employer’s staging date for your opt-out notice to be valid.

If you choose to opt out, you’ll need to put this in writing to your employer – your letter should include the following just above your signature:

  • ‘I wish to opt out of the pension scheme’.
  • ‘I understand that if I opt out I will lose the right to pension contributions from my employer’.
  • ‘I understand that if I opt out I may have a lower income when I retire’.

Note the following statements which set out ‘what you need to know’ if opting out:

  • Your employer cannot ask you or force you to opt out.
  • If you are asked or forced to opt out, you can tell The Pensions Regulator.
  • If you change your mind, you may be able to opt back in – write to your employer if you want to do this.
  • If you stay opted out of the scheme, your employer will normally put you back into pension saving in around three years.
  • If you change your job, your new employer will normally put you back into pension saving straight away.
  • If you have another job, your other employer might also put you into pension saving, now or in the future. The notice only allows you to opt out of pension saving with the employer you name in the notice. A separate notice must be filled out and given to any other employer you work for, if you wish to opt out of that employer’s pension saving as well.

2. If you are:

  • aged between 16 and 74;
  • earn more than £5,876 a year or £490 a month (or £113 per week) but no more than £10,000 a year or £833 a month; and
  • work in the UK

You have the right to opt into the company pension scheme (but won’t be automatically enrolled). Your employer will give you the chance to opt in at the beginning or auto-enrolment or within 3 months of joining the business. The employer won’t ask you again but you can ask to opt in at any future time.

3. If you are:

  • aged between 16 and 74;
  • earn no more than £5,876 a year or £490 a month; and
  • work in the UK

You have the right to join the company pension scheme if you wish. Your employer will give you the chance to join at the beginning of auto-enrolment or within 3 months of starting with the business. The employer won’t ask you again but you can ask to join at any future time.

An opt-in or join-in notice does not need to be a prescribed format, but in order to be valid the notice must be:

  • in writing (this can include being sent by email);
  • signed by you or, if sent by email, must include a statement from you confirming that you personally are submitting the notice.

Your opt-in or join-in notice will only be valid provided you have not previously submitted such a notice within the last 12 months.

  • If valid, your employer must enrol the employee at the next available pay reference period;
  • Your employer will then pay the relevant employer contributions and deduct any necessary contributions from you.

On What figure will I and my employer have to pay pension contributions?

The default position is that you will pay pension contributions on what’s called “qualifying earnings” from your employment.

Qualifying earnings include almost all forms of taxable pay such as:

  • Salary or Wages
  • Commission
  • Bonuses
  • Overtime
  • Statutory Sick Pay
  • Statutory Maternity Pay
  • Ordinary or Additional Statutory Paternity Pay
  • Statutory Adoption Pay

However, you will only pay pension contributions on gross earnings which fall in the following bands:

- Between £5,876 and £45,000 a year }
- Between £490 and £3,750 a month } (bands for 2017/18)

Your specific qualifying earnings will be assessed each and every pay period (normally monthly but it could be weekly or four weekly in some employments).

How much do I have to pay in Pension Contributions?

The contributions you and you and employer will have to make as a minimum are as follows:

Contribution Phasing Period

Minimum Employer Contribution

Minimum Employee Contribution

Minimum Total Contribution

Phase 1

Up to 5th April 2018

1%

1%

2%

Phase 2

6th April 2018 to 5th April 2019

2%

3%

5%

Phase 3

6th April 2019 onwards

3%

5%

8%


There is no requirement on you or your employer to pay more than the minimum but both you and your employer can choose to pay more.

What Pension Scheme will my employer be using?

Your employer can choose any pension scheme provided it meets the conditions set by the Government for auto enrolment. However, the choice of available qualifying schemes is now limited.

As a result, it will probably be the Government backed scheme called The National Employment Savings Trust or “NEST”. The main features of NEST which affect you are:

  • NEST will charge you 1.8% of all contributions going into the scheme;
  • NEST will charge you 0.3% of the total value of the funds in your pot each year (this is a very low rate);
  • With NEST, you receive basic rate tax relief at source (currently at 20%). This means that where you’re required to pay a pension contribution of 1%, only 0.8% of will be deducted from your net salary. You pay the 0.8% and NEST recovers the 0.2% from HMRC on your behalf. If you are a higher rate taxpayer, you can claim more tax relief and you do this via your self assessment tax return.
  • From April 2017, there is no maximum that NEST will allow as an annual contribution into the scheme (prior to this date it was an increasing figure which ended at a maximum of £4,700);
  • Your money is invested differently depending on how close to retirement and to taking your pension you are;
  • From April 2017 there will be more freedom to enable you to transfer your designated retirement pot into or out of NEST. This will help you consolidate your pot if you change jobs.

You can find out more about NEST here: http://www.advancedasset.co.uk/userfiles/files/factsheets/A_guide_to_NEST.pdf

You can find out more about Auto Enrolment and Workplace Pensions here: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/299886/auto-key-facts-enrolment-booklet.pdf

You can also get free independent advice from the Pensions Advisory Service whose details are here: http://www.pensionsadvisoryservice.org.uk/

This guidance is intended only as a factual summary of how auto enrolment will impact you. It is not intended to give any financial advice.