What is auto enrolment?
One of the largest-ever shake-ups in the history of UK pensions, automatic enrolment (auto-enrolment) was introduced in 2012 to provide wider access to pension savings. A changing demographic backdrop means that people in the UK are living longer, but they are not saving enough to finance their increasingly long retirements. Before the advent of auto-enrolment, only 46% of UK employees were enrolled in a qualifying workplace pension scheme.
According to the Department of Work & Pensions, individuals working in sectors such as hotels, construction and agriculture were the least likely to save into a workplace pension. However, since auto-enrolment was introduced in October 2012, two million people have already started saving into workplace pension schemes. It is estimated that by 2018 between six and nine million people will have increased the amount they are saving into a pension scheme, or will have joined a scheme for the first time. Auto-enrolment is designed to provide every worker with the opportunity to amass some savings for their old age, while helping to shift the onus away from the state and on to the individual. Employers are now obliged to enrol all their employees into a qualifying workplace pension scheme, unless the individual makes an active decision to opt out.
In order to be eligible for auto-enrolment an individual must live in the UK, must be aged between 22 and state pension age, earn over £9,440 a year and should not already be signed up to a workplace pension scheme. The employee will be able to decide the level of investment risk they are willing to take with their pension savings although, in the absence of an active decision from the individual, the default option may be relatively conservative. The pension provider will impose an annual management charge which will be deducted from the pension pot.
A minimum percentage of each worker’s “qualifying earnings” have to be paid into their pension pot. Employers have to make contributions and depending on how contributions are made, the government may also make a contribution through tax relief. Each individual will pay in a minimum of 1% of their qualifying earnings, rising to 5% by 2018. Their employer will contribute a minimum of 1% of the employee’s qualifying earnings, rising to 3% by 2018.