In years gone by, employees could decide whether or not to join a workplace pension scheme - there was no obligation for them to do so, and not all employers even offered one anyway. As a consequence, many people didn’t bother.
But that all changed in 2012, when the government introduced a new way to try to ensure as many people as possible were making provision for their retirement.
In response to growing concerns about the decline of companies’ expensive final salary pension schemes and the increasing strain on the state pension as life expectancy rose, it launched the phased introduction of automatic pension enrolment, starting with the largest companies. All employers have been required to offer auto-enrolment since 2018.
The impact of the scheme has been dramatic: the number of workers with a workplace pension has risen from less than half in 2012 to almost 80% as of April 2020, according to the Office for National Statistics.
Importantly, far more young people are saving into a pension, with 80% of 22-to-29 year olds now participating, up from just 24% in 2012. Starting early means they have many decades of saving ahead of them to build up a sizeable pot of money for retirement: it remains ringfenced and inaccessible until at least age 55 (57 from 2028).
How Does it Work?
Under the new scheme, employers have to make available a pension scheme, enrol every eligible employee in it as a matter of course, and pay in a certain minimum amount alongside the employee’s contributions.
The current total minimum contribution is 8% of your qualifying earnings before tax. Qualifying earnings include any employment income (not just salary but extras such as commission, bonuses and overtime) in the basic rate tax band between £6,240 and £50,270 (in 2021/22).
In real money this means that if you earn, say, £30,000, at least £1,900 (£30,000 - £6,240 x 8%) will be added to your pension pot each year. However, if your earnings total £50,270 or more, the minimum annual contribution is capped at £3,522.
Of the 8% minimum total, the employer must pay at least 3%, in which case your contribution will be 5% (including 1% tax relief from the government). If your employer is more generous you could choose to pay less.
The government provides full income tax relief on your pension contributions LINK. Basic rate relief at 20% goes into your pension pot automatically, and if you pay higher or additional tax you can reclaim a further 20 or 25% through your self-assessment form, though it won’t automatically be paid into your pension.
So who counts as “eligible”? To qualify, you have to be over 22 and under state pension age, normally work in the UK and be earning more than £10,000 a year. But if you’re not eligible (because you’re outside the age range or don’t earn enough), you can still ask to join your employer’s scheme – it just won’t happen automatically. According to The Pension Regulator, 30% of non-eligible staff requested to join the workplace scheme in 2017/18.
Can You Opt Out? And Should You?
If you don’t want to be in the scheme, you can opt out of it once your employer has enrolled you, though every three years you will be automatically re-enrolled and will have to choose to opt out again, if that’s still what you want to do.
Leaving the scheme within a month of being enrolled means any money you have paid will be refunded in full. If you withdraw after this initial period, your pension pot usually remains invested within the scheme and becomes accessible once you reach pension access age (currently 55).
In most cases, remaining auto-enrolled is by far the most sensible route because of the added benefit of the corporate top-up, which you won’t get from other types of pension or savings options. It’s also the easiest option, as you don’t need to take any action - your own contribution is taken out of your pay packet by your employer each time you’re paid.
However, there are some situations where you may want to consider opting out. If you’re struggling to make ends meet on a low income, you may feel pension saving has to wait until your finances are on a firmer footing. Similarly, it may make sense to focus first on clearing expensive debts before starting to save for the long term, particularly if you’re behind with repayments.
Some employees will already have a Sipp or other personal pension that they invest themselves in a wider range of funds than is available in most workplace pensions, and they may prefer to continue building that pot up. It’s worth asking your employer if it would consider paying contributions into your personal pension rather than the workplace pension – some may be willing to do so.
Finally, bear in mind that small increases to the amount you pay into your pension can make a huge difference over the decades, especially if your employer is willing to boost its contributions too.
Similarly, although around 95% of memberships in auto-enrolment schemes are invested in the “default” fund choice, investing in a slightly riskier fund is likely to produce notably better returns over the long term, and that can really help to boost your pension pot. The Which? pension calculator is an interesting place to see how much difference you could make.
