Automatic, or auto, enrolment is a government initiative to help everyone save into a pension plan for their future. But what is it, why does it apply to you, and what do you have to do, we hear you ask? Sit back and read on for all the details…
When did it happen?
While it began to be phased in as long ago as 2012, initially it only applied to larger companies. However, it was then rolled out to all, and by February 2018 there was a legal requirement for all businesses, regardless of size, to offer a pension and automatically enrol its eligible employees on to it.
Why is it important?
Not everyone has a pension plan in place, making for an uncertain future. In fact, not every company was required to offer a pension plan which made it harder for employees to find a suitable scheme.
Pensions are important not only because they offer a future pot of money for when you come to retire, but they have a number of benefits that are not available with any other savings scheme. Your employer will make contributions directly into your pension that you would not otherwise get. That cash is not available in any alternative form and you cannot negotiate a higher salary in lieu of those contributions.
At the same time, the government will give you tax relief on the contributions that you make. The tax that you pay will be returned on those eligible contributions and invested directly into your pension. As with employer contributions, this is not a pot of money that is available in any other way. Without a pension scheme you forgo both contributions from your employer and tax relief that would go towards building up your future pension pot.
Must I participate?
While you must be automatically enrolled, you do have the option to opt out if you so choose. Opting out from a particular scheme has an expiration date of three years. So, after that time your employer will re-enrol you – subject to you fulfilling the eligibility criteria – at which point you can opt out again if you wish.
What are the eligibility criteria?
To be eligible, you must:
- Be 22 years old or older
- Have not reached State Pension age
- Be earning a salary of £10,000 per annum (pro-rated)
- Be working in the UK under an employment contract
How much must you pay?
There are minimum contributions that must be paid between you and your employer and it is your employer who will determine the split. They must, however, make a minimum contribution of 3% with the total contribution totalling 8%. This means that your contribution will be 5% in this example. This will of course vary if your employer makes a higher contribution on your behalf.
Confused, or want to know more about how pensions affect you and your circumstances? Then get in touch with our team of experts at Hammonds Accountants. You’ll find us on the phone on 0203 007 4990 or on email at and we’ll be delighted to help.