Pension auto-enrolment introduced today

As of today companies with more than 120,000 employees must automatically enrol their staff into a company pension scheme.

The scheme will be rolled out to all businesses by 2017.

Employees aged over 22, earning more than £8,105 and not already signed up to a workplace pension scheme will be automatically enrolled into a pension scheme, unless they choose to opt out.

How will auto-enrolment work?

Savers will have to put aside just over £2 a week to get them started in the pension scheme, according to NEST, a non-profit pension scheme set up under the new rules.

In the first four years of the scheme, workers will contribute a minimum of 0.8% of earnings, which works out at around £2.37 a week for someone on an average annual salary of around £20,000.

Based on this average, employers will contribute nearly £3 per week as well and almost 60p will be added in tax relief, meaning the total going into the pension pot is just under £6 a week, or around £25 a month or £309 a year.

But by 2018, as the minimum contribution increases, employees will be putting aside around £12 of their pay every week, in return for almost £9 from their employer and nearly £3 in tax relief, leading to average annual contributions of £1,235.

What pension scheme must employers use?

Employers must use either the government’s National Employment Savings Trust (“NEST”) scheme or a “qualifying scheme”.

The maximum annual contribution limit for the NEST scheme is £4,200 for 2011/12. Employers are charged an annual management fee to use the scheme (usually 0.3% of a member’s fund value).

Qualifying schemes include occupational or personal pension schemes which are registered under the Finance Act 2004. These pension schemes must also meet the “quality requirements”, set out in the Pensions Act 2008.  

What level of contribution is needed?

Under automatic enrolment, employees will eventually contribute 4% of their earnings towards their pension, employers 3% – and this combined with 1% tax relief will make up a total contribution of 8%.

Once an employee has been auto-enrolled, their contributions must be calculated according to their qualifying earnings. For 2012/13, this is likely to be a band of earnings between £5,564 and £39,853.

Do employers have to make contributions as soon as the auto-enrolment starts?

No.  These contributions will be phased in over 5 years as follows:

  • During the first 5 years, employer and employee contributions will both be 1%.  
  • During the fifth year, the employer contribution will be 2%, whereas the employee contribution will increase to 3%.
  • From the end of the fifth year onwards, the contributions will be as set out above.

How employers inform employees about the scheme

Employers must inform their employees in writing if they are being enrolled into a workplace pension or not. In the letter they must let employees know the date of their enrolment, the pension scheme they will be enrolled into, how much will go into their pension and how they can opt out of the scheme.

How can employees opt out?

The employee must give notice to opt out of the scheme within one month of the date on which they became a member of the qualifying scheme or within one month of the date on which they received enrolment information (whichever date is the later).

If an employee has opted out, the employer has a duty to automatically re-enroll that employee every three years.  Obviously the employee may opt out each time.

When is auto-enrolment being introduced for smaller businesses?

Small and medium-sized business are being advised to prepare for the new auto-enrolment rules as they are being phased in over the next few years, as follows:

  • Firms with more than 250 employees – 1 February 2014 deadline
  • 50-249 employees – 1 April 2015 deadline
  • 30-49 employees – 1 October 2015 deadline
  • Less than 30 employees – 1 April 2017 deadline

More information

Published on: October 1, 2012

Did you like this article? Share it!

Running Your Own Business Made Easy

Running own business guide advert

A comprehensive guide to becoming self-employed and setting up and running your own business.

Read More