Not auto-enrolled yet? Five things you need to know
Auto-enrolment was first introduced in 2012, making it compulsory for employers to enrol eligible staff into a pension scheme. It is being phased in over a six-year period, starting with the largest employers. The smallest and newest firms will reach their ‘staging dates’ by February 2018.
There are currently around 7.5 million people enrolled in a workplace pension and half a million employers have complied with the regulations. But with auto-enrolment in its final stages, these numbers are expected to swell further.
Below are five key points you need to be aware of regarding auto-enrolment:
To be eligible for auto-enrolment, you need to be aged between 22 and State Pension age, and you need to earn at least £10,000 per year from a single job. This means if you have multiple jobs, each earning less than £10,000, even if the sum of earnings from the multiple jobs exceeds this figure, you won’t be automatically enrolled. However, if you’re under the age of 22 or above the State Pension age, and you earn less than £10,000, you can still ask to join a workplace pension but you won’t be automatically enrolled.
2) Qualifying earnings
As well as the £10,000 earnings trigger for auto-enrolment, employers also need to take note of a second threshold or ‘Qualifying Earnings’ figure which relates to the minimum contributions which have to be paid in accordance with the auto-enrolment legislation. For the 2017/18 tax year, the basic annual amount is £5,876 while the higher amount is £45,000.
Someone earning £5,876 or under is entitled to join a pension scheme but the employer does not have to contribute. An employee earning between £5,876 and £10,000 (the pensionable income) is also entitled to opt in to the auto-enrolment scheme and the employer must contribute. If an employee earns an annual gross salary of £50,000 (above the higher qualifying earnings figure of £45,000), the pensionable income for contributions is £39,124 (£45,000 – £5,876).
The minimum pension contribution under auto-enrolment is currently 1% from the employer and 1% from the employee, meaning a 2% total contribution. This means someone earning the average salary of £27,000 per year will have pensionable earnings of £21,124 (£27,000 minus £5,876) so they pay £211.24 into their pension and their employer contributes £211.24 too, with the total annual contribution at £422.48.
3) Your contributions gain tax-relief
With workplace pensions, employees receive tax relief as well as employer contributions. Taking a basic rate taxpayer, for every £800 invested, the government adds £200 to make a total of £1,000 in the pension scheme but as the employer also contributes £1,000, this means a £2,000 pension pot only costs a basic rate taxpayer £800.
As above, based on the average annual income of £27,000, both the employer and employee pay in the minimum 1% which is £211.24. Martin Tilley, director of technical services at Dentons Pensions, explains that because of the 20% tax relief on an employee’s contribution, it would only actually cost them £168.99, so they pay 0.8% while the government pays 0.2%.
Higher rate taxpayers receive a greater uplift from tax relief. If they pay in £800, the government adds £200 and workers can also claim a further £200 from their self-assessment tax return meaning a higher rate taxpayer only needs to put in £600 to get £1,000 in their pension (or £2,000 including employer contributions).
As an example, someone earning £50,000 will have a pensionable income of £39,124 (see above) so a 1% contribution is £391.24 from each of the employee and employer. However, initially the higher rate employee would only pay 0.8% (£312.99) and if they claim the additional 20% tax relief via self-assessment, it would only cost them £234.74 for a pension pot of £782.48.
4) Rising contributions
Currently both the employee and employer pay 1% each so that’s a total 2% contribution. From April 2018, minimum auto-enrolment contributions rise to a total of 5% , made up of 2% from the employer and 3% from the employee. They increase further from April 2019 to 8% – 3% from the employer and 5% from the employee.
If you don’t think you can afford a jump in contributions from 1% to 2% and then 3% in two years’ time, The Pensions Regulator (TPR) says an existing pension scheme may allow you to remain at the lower contribution rate, or to reduce your contributions after the increase.
A spokesperson, said: “This means they continue to be a member of the scheme, but as contributions are below the minimum level required by law, the scheme will not be a qualifying automatic enrolment scheme for them. This means they will be picked up at re-enrolment and if they’re eligible on the re-enrolment date, they’ll be automatically re-enrolled at the increased minimum rates.” Re-enrolment occurs every three years but once you’re enrolled, you can opt out.
5) What happens if you’re already in a workplace pension?
If your employer offers a workplace pension outside of auto-enrolment (perhaps you work for a smaller company that has not reached its staging date), you may receive different levels of employer contributions or no contributions at all. Once a firm reaches its staging date, all eligible staff must be auto-enrolled and contributions paid on eligible pensionable income.
TPR said that an employee already in a workplace pension may also be auto-enrolled, meaning there’s a chance they pay into two pension schemes. Or an existing firm’s scheme may already be compliant with the requirements meaning there’s no change for employees.
Kate Smith, head of pensions at Aegon UK, said it is possible for employers to reduce their contributions to the auto-enrolment minimum, but the company will need to check employees’ contracts and give notice of the change. “It’s not likely to be a popular move with employees. Some employers have cut contributions when they reached their staging date as they have to put more of their workforce into a pension scheme, which increases their costs,” Smith said.
You can opt out of auto-enrolment but you can only do so once you’ve been enrolled. If you do decide to opt out within the first month, your contributions will be refunded to you. Under the legislation, every three years employees are re-enrolled.
Tilley said that with the tax-relief and contributions, plus with the ability to withdraw 25% of your pension pot tax-free from the age of 55, the workplace pension is a “no-brainer”.