What is pension auto enrolment?
Auto enrolment has now been rolled out to most companies in the UK (and should be completed by February 2018). If you work in the UK, you should automatically have been enrolled in your companies pension scheme, if you weren’t already a part of it.
How does it work?
You contribute a certain percentage of your wages every month into the scheme. The government will also give you 20% tax back on your contribution (provided you have paid that much tax), and put that in your pension scheme. Finally, your employer will also be obliged to contribute a certain amount towards your pension.
When you’re automatically enrolled, you’ll get a letter from your employer explaining what is happening, and it will also give you the opportunity to opt out of the scheme. If you opt out within the first month, you will get a refund of any contributions you have made. If you opt out after that, any money you’ve paid will stay in the pension and you won’t be able to get it back until you retire.
If you’ve opted out, your employer will also automatically re-enrol you every 3 years, but again, you can opt out under the same conditions as before.
For more information, go to the government website here.
What is the benefit to me?
Well, it’s free money! Everyone likes free money don’t they?? Also it’s Tax Free. No one likes paying tax either do they??
There are two different ways to make contributions, if your contributions are taken after tax, then read on. If your contributions are taken before tax, called Salary Sacrifice, then the method is slightly different (see What is Salary Sacrifice?).
When you are first enrolled, you will pay 0.8% of your salary into the pension scheme, the government will give you 20% tax back to make your contribution 1%, and then the company will also pay 1% of your salary, for a total minimum of 2%.
This raises to 2.4% (+20% tax = 3%) from you and 2% from your employer from 6 April 2018 and 4% (+20% tax = 5%) from you and 3% from your employer from 6 April 2019 (more details here).
So, for example, if you earn £25,000 a year, then from 6 April 2019, you will contribute 4% of your wages, which is £83.33 monthly. You will then get the 20% tax paid back on that, which is another £20.83, and the government will pay 3% of your wages which is £62.50. So for your payment of £83.33, you get £166.66 into your pension each month, double the amount.
If you’re lucky enough to be in the higher 40% or 45% tax bands, you may be able to claim back the additional tax through your self-assessment return. See the Pensions Advisory Service website for more information.
Don’t forget – if you don’t contribute, your employer doesn’t have to either, so it is in your interests to contribute because it’s essentially a pay rise. On the flip side, it’s in your employers interest to make it as easy as possible for you to opt out, because they save money!
Further Reading
What happens to my pension if my company goes bust?
(AAG)