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nigel woollsey

Nigel Woollsey

Online Writer
Published: 19/03/2019

At a glance

  • Auto-enrolment is where workers are automatically enrolled into a pension at their workplace.
  • In simple terms, a sum of money is taken out of your wages and put into a pension fund. Your employer also contributes to this pension pot.
  • While you can opt out of this scheme, doing so means you will be missing out on all your current employers’ contributions as well as Government tax relief – leaving you with less of a pension than you would otherwise have amassed.

We're all being urged to plan for our retirement, but unfortunately not everyone gives it the attention it deserves. Well, times are changing, with the Government's auto-enrolment scheme doing its best to help tackle the pensions crisis and get people saving for their golden years.

But just what is auto-enrolment, and what does it mean for you? We've put together a quick guide to answer these vital questions so you can look to the future with confidence.

 

What is auto-enrolment?

Auto-enrolment is a Government initiative whereby eligible workers are automatically enrolled into a workplace pension. The employers themselves will be responsible for arranging a suitable scheme (they could have their own pension, they may offer one from a specialist provider or they may use a Government-backed scheme), with employees of all kinds gradually seeing a portion of their pay packet being diverted into their pension pot.

Who will be signed up?

Anyone who meets the following criteria will be automatically enrolled:

  • Those who work in the UK (excluding the self-employed)
  • Those over 22 years old but under state pension age
  • Anyone who isn't already in a qualifying pension scheme
  • Workers who earn more than £10,000 a year (tax year 2019/20)

This means that a large proportion of UK employees will be signed up – millions already have been – and even if you don't meet the criteria, you can still opt-in should you wish. This applies to part-time workers who perhaps earn less than the threshold (and if they earn over £6,136, their employer will have to make a contribution too), as well as those who are under 22 or over state pension age but still working.

How does it work?

Basically, a proportion of your eligible earnings will go into your pension pot each month, which will be topped up by your employer's contribution as well as Government tax relief.

In April 2019 the minimum contribution rose to the equivalent of 8% of a worker's earnings – with a minimum 5% employee contribution and 3% from the employer.

However, that's not the whole story. Your money won't just be sitting there idly – most pensions are known as 'defined contribution' schemes, which essentially means that your pension is an investment and that your money will actually be working for you. The pension provider will usually give you a choice of how risky you want your investments to be, and the final value of your pension pot will be determined by how successful they were. 

How much will I save?

How much you'll save will depend on your salary and the specific scheme you've been signed up to, and although minimum contribution levels have been set, there's nothing to say that individual schemes or even personal choice can't increase those levels for a bigger final pot (just bear in mind that most schemes will take a small percentage of your annual savings as a management fee, too). 

What if I change jobs?

The days of people staying in one job for their entire working life seem to be a thing of the past, and that means you may be wondering what would happen to your pension fund should you change jobs. Luckily, there's no cause for concern – your pension is yours and the money will still be invested until you reach retirement, and once your company has auto-enrolled you into a new pension scheme there are usually a couple of options for you to consider:

  • You can continue making contributions to your previous pension, or
  • You can combine the old and new pension schemes together.

Make sure to discuss the options with your pension provider. 

Can I opt out?

Yes. If you perhaps need your whole pay packet to pay bills or have a private pension scheme you think is sufficient, you can always ask for an opt-out form. If you do so within one month of being enrolled, your involvement will be automatically cancelled, but if it takes longer, you'll start to accrue a small pension pot, which you won't be able to touch until retirement. You'll be automatically re-enrolled every three years so will need to go through the process again should you wish to remain out of the scheme. 

Pros and cons of auto-enrolment

  • Makes pensions affordable for the majority of people – especially with your employer adding to the pot.
  • You get tax relief on your contributions.
  • All arrangements are taken care of by your employer.
  • While your employer chooses the pension scheme, you’ll usually have some form of control over where your money is invested (but you could also stick with the default fund choices should you wish).
  • It can be one of the best ways to build a pension pot, and in turn boost your chances of having a suitable retirement income.
  • You’ll have a little less in the way of take-home pay.

Moneyfacts tip

Moneyfacts tip nigel woollsey

It's worth noting that opting out means you're effectively missing out on money being given to you by your employer. You wouldn't get those contributions any other way and almost certainly wouldn't get them through your regular pay, so it's often financially worthwhile to stay enrolled. Remember, too, that it pays to start saving early to give you sufficient time to accumulate a large enough pot for when you retire.

Dislaimer

Disclaimer: This is a basic guide to auto-enrolment and does not cover every circumstance. The information it contains is correct as of April 2019. Some of the information may become inaccurate over time, for example because of changes to the law. 

Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.

light bulb in shape of question mark

At a glance

  • Auto-enrolment is where workers are automatically enrolled into a pension at their workplace.
  • In simple terms, a sum of money is taken out of your wages and put into a pension fund. Your employer also contributes to this pension pot.
  • While you can opt out of this scheme, doing so means you will be missing out on all your current employers’ contributions as well as Government tax relief – leaving you with less of a pension than you would otherwise have amassed.

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