Automatic enrolment – What you need to know

As you may already know, under ‘The Pensions Act Of 2008’, every employer in the UK must submit certain members of staff into a workplace pension scheme and contribute towards it. Even if you only employ one person at the least, you have a legal duty to set up a pension scheme under ‘automatic enrolment’.

For ease, we’ve pulled together a quick summary of what you need to know whether you are an employer or an employee. So, here’s what you need to know…

What is it?

It's a system designed to make an easily accessible pension scheme for workers, enabling them save towards their retirement and enjoy an income which is a lot higher than the basis state pension. The basic state pension is for people who reached the state pension age before April 6th, 2016. The Government pays these people ‘the basic state pension’ which is, at its maximum, is ￡141.85 per week in 22/23. But obviously, if you were to be a part of the auto enrolment scheme that is being contributed to regularly, your pension will increase.

Who is eligible?

To qualify for automatic enrolment, you must be:

- Between the ages of 22 and state pension age.

- Working in the UK under a contract of employment.

- Earning more than ￡10,000 per year (￡833 per month).

If you do not meet the eligibility requirements right now, you might do at some point in the future. For example, when you turn 22 or if you get a pay rise, this inserts you above the threshold and allows you to tick all the boxes into being automatically enrolled onto the pension scheme.

If or when you do become eligible, your employer should write to you and let you know. The letter/email will state:

- The date they added you onto the pension scheme.

- The type of pension scheme and who runs it.

- How much they will contribute and how much you will have to contribute to stay in the pension scheme.

- How you can leave the scheme if you would like to.

Who isn’t eligible?

In some rare instances, your employer will still not automatically enrol you when you meet these entry requirements. This could be because you have handed in your notice, or you have been notified that soon you will not be working the same job. Therefore, you wouldn’t be on the pension scheme for very long at all. Also, if you are self-employed, then automatic enrolment does not apply to you but you may still set up a pension scheme for yourself online.

How does it work?

Normally, a percentage of your ‘qualified earnings’ has to be put into your pension each payday. What we mean by ‘qualified earnings’ is amounts above ￡6,240 per year (￡520 per month, ￡120 per week, ￡480 per four weekly).

Your ‘qualified earnings’ include your wages or salary, any bonuses, commission as well as other items such as statutory pay, before any tax or national insurance contributions are deducted.

The scheme states that 8% of your qualified earnings must be contributed towards your pension scheme and then your employer must contribute a minimum of 3% - so you have to make up the difference (5%).

But, if your employer is generous enough to contribute the full 8% into your pension scheme, it would mean that you wouldn’t have to contribute anything although you could contribute more if you would like to.

Most of the time, this isn’t the case which would mean you would have to contribute 5% of your qualified earnings but there is usually a tax relief programme set in place which allows you to pay less than you may originally think.

How do I opt out?

From the start date of your automatic enrolment pension scheme, you will have a month to decide whether you would like to continue with the scheme and pay money towards your pension on a regular basis. If you choose to exit the scheme withing the first month of you being enrolled, then any contributions you have made will be refunded.

If you choose to exit the scheme after a month of your enrolment, then the contributions will go straight into your pension pot, but you will not contribute any more as you have left the scheme.

It is most likely that you will not be able to enrol back onto the pension scheme for 12 months after choosing to exit. Even if you do not ask to be put back onto the pension scheme then your employer may add you back anyway after 3 years from your exit. This is called re-enrolment.

We hope this helps shed a little more light on what the auto-enrolment schemes mean and how it operates. If you are an employer and require any further advice or have any questions, please feel free to message us.