The ultimate end goal for every UK worker is retirement.
However, the road to a fulfilling retirement with financial security and comfort, is intricately tied to the world of pensions.
In this blog, we aim to illuminate the path to retirement by shedding light on what every payroll professional needs to know about the automatic enrolment process.
What is automatic enrolment?
Automatic enrolment (also known as auto-enrolment) is when an employee who meets certain requirements is made a member of a workplace pension scheme without needing to ask to be part of it.
In the past, it was up to workers to decide whether they wanted to join their employer’s pension scheme.
But since 2012, employers have been gradually required to automatically enrol their eligible workers into a workplace pension scheme.
As a result, more and more people are able to build up savings that they can use to provide them with an income from the age of fifty-five onwards. This is set to change to age fifty-seven in 2028.
Who is eligible for automatic enrolment?
Regardless of whether you are employed on a full-time or part-time basis, your employer is obligated to enrol you in a workplace pension scheme if you satisfy the criteria outlined in the auto-enrolment rules:
- You work in the UK.
- You are not already in a suitable workplace pension scheme.
- You are at least 22 years old, but under state pension age.
- You earn more than £10,000 a year for the tax year 2023/24.
Why is automatic enrolment a legal requirement?
The evolution of automatic enrolment is centred around safeguarding employees, ensuring they benefit from optimal financial pre-planning to adequately prepare for retirement.
This positive initiative is underscored by the 2008 Pensions Act, which legally requires organisations to:
- Offer a workplace pension.
- Pay into that pension at a required rate.
How can I check if I have been auto enrolled into a pension by my employer?
The quickest way to confirm your enrolment in the workplace pension is to check your payslip. You should be able to find both your contributions and your employers in the deductions section.
Alternatively, you can ask your HR department.
What are the minimum contributions?
The government establishes an annual minimum contribution amount. This represents the lowest total sum required to be deposited into the employee’s pension fund, encompassing contributions from both you and your employer.
Additionally, the government contributes through tax relief, enhancing the overall funding for the pension.
For 2023-2024 the lower limit is £6,240 and the upper limit is £50,270.
As of 6th April 2023, the minimum contribution is:
- 5% from employees (including the government’s tax relief).
- 3% from employers.
These are minimum contributions that are taken from your ‘qualifying earnings’ before tax or National Insurance contributions are deducted.
Your qualifying earnings include:
- Statutory sick pay.
- Statutory parental pay.
Certain “generous” employers extend pension contributions to cover your entire earnings, not restricting it solely to qualifying or basic earnings.
The extent of this coverage depends on the setup of your specific scheme, whether it considers only qualifying earnings, basic earnings, or total earnings.
Consequently, bonuses, overtime, or commission could potentially factor into your pension contribution in certain organisations.
Speak to your employer to know how much of your earnings you’ll be contributing each year.
What if I’m not eligible for automatic enrolment?
If you find the pension scheme appealing and wish to secure assistance from your employer in planning for your future, there’s an option even if you don’t meet the automatic eligibility criteria.
Specifically, if your annual earnings fall below £10,000 (but exceed £6,240 in the 2023/24 tax year), your employer isn’t obliged to enrol you automatically. However, you retain the right to request membership, and they are obligated to permit your enrolment if you express interest and commit to making contributions.
Essentially, it’s enrolment without the auto.
Can I opt-out of automatic enrolment?
While automatic enrolment is mandatory, remaining enrolled isn’t. You have the option to opt out if you choose to do so.
Perhaps you’ve discovered a more suitable pension scheme elsewhere, or you simply prefer to allocate your funds differently through alternative investment options.
Don’t forget, if you qualify for it, it’s automatic—so you’ll have to proactively opt-out.
The decision to opt in or out is entirely yours and does not impact your rights within the organisation or your job in any way.
Opting out within the initial month of enrolment ensures a full refund of any contributions made. However, if you decide to leave the pension scheme after the first month of active membership, the initial contributions may have already been deducted and will remain in your pension fund.
Therefore, if you wish to opt out, it is advisable to ack fast…
If you opt out and want back in? Is there re-enrolment?
Yes, you can opt-out at any time, and you can also re-enrol too. However, in most contracts you can’t re-enrol more than once every 12 months.
If you have opted out, your employer will carry out a re-enrolment process every three years, on the anniversary of the organisation’s staging date and if you still qualify during the re-enrolment—meaning you’ll be automatically re-enrolled again.
But it’s always your choice to opt-out if you want to. And equally, it’s also your right to re-enrol.
What are the pros and cons of opting out of pension auto-enrolment?
Opting out of your workplace pension means missing out on both the employer’s contribution, which is essentially free money, and the tax advantage provided by the government.
Additionally, since savings compound over time, skipping a year or two could potentially diminish your returns in the long run.
Here are the main pros and the cons, depending on your personal circumstances:
- Opting out means you’ll get more take-home pay each month.
- You can change your mind at a later date and rejoin the scheme if you wish.
- You’ll miss out on contributions from your employer.
- You’ll miss out on tax relief on your pension contributions.
- You’ll need to save harder, later in life. By shortening the number of years you pay into a pension, you’ll lose investment growth and need to pay more into your pension yourself.
How to manage automatic enrolment
While automatic enrolment is undeniably advantageous for your workforce, effective management is crucial in handling the various aspects of payroll and contributions.
Getting this right will ensure you’re compliant and your people will receive the correct pay and pension.
The 7 steps to managing your automatic enrolment with efficiency and compliance are:
- Identify your staging date: This marks the commencement of your automatic enrolment responsibilities. It’s crucial to have automatic enrolment in place from the opening of your organisation.
- Select a pension scheme: Ensure it aligns with the requirements for automatic enrolment. You can either opt for a provider offering a scheme designed for automatic enrolment or establish your own.
- Communicate with your employees: Inform them about the automatic enrolment procedure and its impact on them. Your teams need to be aware of the chosen pension scheme, their contribution amounts, their right to opt out, and their option to rejoin later.
- Assess your workforce: Determine which employees meet the eligibility criteria and which don’t.
- Enrol your employees: Once you’ve completed the assessments, eligibility checks, and provided information, it’s time to officially enrol individuals.
- Maintain accurate data: Keep precise, up-to-date records of your automatic enrolment process, including details of employees who opted in or out. Also, document all communications related to enrolment with employees.
- Monitor eligibility continuously: Regularly check and calculate contributions for enrolees. For those who opted out, reassess their eligibility every three years.
The 4 key benefits of automatic enrolment
1. Encourage saving
It makes sense right? If people aren’t saving for the future, they could potentially be left with an inadequate retirement income.
Introducing automatic enrolment simplifies the process for employees to participate in a workforce pension scheme, providing a convenient way for them to safeguard their future financial well-being.
2. Improve financial security
Individuals who opt for automatic enrolment enhance their financial security as they approach retirement.
This choice ensures they will have a steady income beyond solely relying on a state pension. Through automatic enrolment, individuals gain the ability to access income from their pension fund starting at the age of 55.
3. Increase employee satisfaction
Offering a robust workplace pension stands out as a crucial employee benefit, fostering loyalty and elevating job satisfaction.
Going the extra mile with enhanced contributions takes this commitment a step further. Organisations that contribute beyond the mandated minimum are likely to be highly regarded by their workforce.
Various schemes present enticing features, such as fixed percentage contributions, matching contributions up to a specified limit, or escalators that progressively boost the contribution percentage over time.
These elements serve as significant incentives for employees to remain dedicated, continue their work, and witness the growth of their pension funds.
4. Reduce reliance on state pension
The implementation of automatic enrolment results in an increased number of individuals with private pensions, alleviating the strain on state pensions and contributing to the sustainability of the pension system.
Still not convinced by automatic enrolment?
HMRC recently issued a press release highlighting some of its accomplishments: In ten years of automatic enrolment (since its creation in 2012) employees have saved over £114bn into their pensions.
To commemorate automatic enrolment’s tenth birthday, various prominent figures within the business or political word were asked to share their views.
Minister for Pensions, Laura Trott, said:
“Automatic Enrolment has completely transformed how people save – with staggering results. In the ten years since its introduction, 10.7 million people have started saving for their pensions with this easy to use scheme. We have also seen a huge and much needed increase in women and young people being enrolled into a pension.”
Retail Entrepreneur and Dragons’ Den investor Theo Paphitis, said:
“In the ten-years since I was involved in the launch of Automatic Enrolment, pension saving in the UK has gone from strength to strength with more than two million workplaces signed up – this is something to celebrate.”
Nest’s CEO, Helen Dean, CBE, said:
“Over the past 10 years, Automatic Enrolment has completely changed the UK’s saving landscape, bringing millions of new people into pensions saving, many for the first time. It’s taken a lot of hard work and dedication, from the people who develop the policy, to schemes across the pensions industry, and employers up and down the country.”
Choose JPS for all your auto enrolment needs
Our payroll experts are dedicated to ensuring a seamless and efficient auto enrolment process, allowing you to save time, enhance productivity, and steer clear of potential penalties in this intricate sector.
Our auto-enrolment management service will:
- Help you administer a plan that ensures you meet your obligations.
- Automatically enrol eligible jobholders and manage opt-ins/opt-outs.
- Periodically re-enrol eligible jobholders who are not in a workplace pension scheme.
- Provide employees TPR approved assessments letters and deductions of contributions through payroll.
- Register your company with The Pension Regulator.
- Work with the Pension Regulator to ensure your auto-enrolment processes remain up to date.
- We can answer your auto-enrolment questions, hold records and carry out regular monitoring checks.
If you’re interested in exploring how we can simplify the process of automatic enrolment for you, feel free to reach out here.