What is pension automatic enrolment?

About 20 years ago, the then government, after realising the UK had a big problem not saving enough for their later life, adopted automatic enrolment into pensions.

Now, generally, every time you join a new employer, you’ll automatically join their pension scheme without having to complete any paperwork. You will start saving for a pension without having to make any big decisions. And it’s not just your money going towards your later life - your employer is also paying in.

This can be a big part of your plans to save for your future, so it’s worth knowing how it works, so you can get the income you want in retirement.

Does my employer have to do this?

Yes. All employers have to choose a pension scheme and automatically enrol their workforce into it. It doesn’t matter how small your employer is, even if they only employ you.

Will I be automatically enrolled?

Yes, as long as you meet some general criteria. You have to be 22 years old and younger than state pension age, which is currently 66. You also need to earn at least £10,000 a year from this employment, and that includes your wages as well as any bonus or overtime.

What happens if I don’t meet the joining criteria?

If you are outside the age limits, or don’t earn at least £10,000 a year from that job, then you can usually ask your employer if you can join their pension scheme. It won’t happen automatically, but if you do ask, then your employer has to arrange this and may also have to pay into the pension so you could benefit from their contribution.

Do I have to complete any paperwork if I’m automatically enrolled?

No. Even if you do nothing, you’ll be automatically enrolled into the pension. The basic level of your contributions will be deducted from your pay-packet and paid over to the pension. The employer will pay in their contributions too.

How much will I have to pay?

You have to pay at least 4% of your earnings between £6,240 and £50,270 a year. Your employer also pays 3%, and the government adds in another 1% through tax relief.

However, the pension plan may be set up on a different basis, and you could pay an equivalent amount, just based on your whole salary, not a band of earnings.

Can I pay in more than that?

Yes! But first, it’s worth checking with your employer what happens if you increase your contributions. Some employers may match that increase by also raising their contribution rate. If they do, then this could be a significant boost to the amount of money you are saving in a pension.

Even if your employer doesn’t offer to pay in more, you may still want to consider increasing the amount you pay in. Think about your monthly budget and whether you can afford it, and what other savings you have. Remember, the government will add in tax relief to any extra contributions you pay in.

There are overall limits about how much you can pay in and still get tax relief. Broadly, these are up to 100% of your UK earnings for your own contributions, and £60,000 total for both your and your employer’s contributions and also includes tax relief from the Government.

Can I decide not to join?

Yes. It’s not compulsory. If you don’t want to join you can opt out by letting your employer know. But if you opt out, your employer will also stop contributing money. They are not allowed to give you that money any other way – for example as extra salary - so you will lose that money from your employer.

It’s important to note that if you decide to opt out, your employer will automatically enrol you again after three years. If again you do not want this pension, then you will have to opt out all over again.

Can I choose what pension plan to join?

Unfortunately not; your employer chooses the pension plan and enrols you into that one. You can ask your employer to pay into a different plan, but they are not required to do so.

You can transfer your pension plan to a different one that you choose. But you need to be careful about losing your employer contribution, so you may want to wait until after you have left that employment.

You could also investigate putting any extra contributions you pay above the minimum into a different pension plan that you choose.

Do I have to choose funds to invest my money in?

Not unless you want to. Your contributions will automatically be invested in a ‘default investment fund’. This is a fund designed to suit everyone, and will be a ‘balanced’ fund, meaning it won’t take big investment risks, so it shouldn’t suddenly fall in value. But at the same time, it probably won’t grow in value at the same rate as other funds.

You can, however, choose to invest in different funds. You can ask your pension provider for details of alternative investments and decide if any suit your needs. Remember, you are probably investing for a long time, and could consider taking some risk with your investments depending on how long you have left until retirement age.