Auto enrolment explained
27 Feb 2024
Auto-enrolment is a phrase you might have heard tossed around the workplace, but what does it really mean for you and your future? Let's break it down into simple terms.
What is Auto-enrolment?
Auto-enrolment is a system introduced by the government in 2012 to help more people save for retirement. Before 2012, joining a workplace pension was optional and required employees to opt-in. Now, employers must automatically enrol eligible employees into a pension scheme. This change means that many more people are on track to having savings for their later years, starting from age 55, which will be updated to 57 in 2028.
How did Auto-enrolment Start?
It began gradually in 2012 with large businesses and gradually included smaller businesses. By now, every employer should be offering this to eligible employees. If you believe you should be enrolled but haven't been, it's a good idea to speak to your employer for clarification.
Who Qualifies for Auto-enrolment?
You will be automatically enrolled if you:
Work in the UK
Are not already in a suitable workplace pension
Are at least 22 years old but under the State Pension age
Earn more than £10,000 a year
Your Contributions
The total minimum contribution to your pension is made up of contributions from you, your employer, and tax relief from the government. Currently, this is 5% from you (including tax relief) and 3% from your employer. However, this only applies to your earnings above £6,240 and up to £50,270 for the tax year 2024/25. Keep in mind, different employers might calculate contributions differently, so it’s worth checking how yours are worked out.
Opting Out
While automatically enrolling helps build your retirement savings effortlessly, you do have the option to opt-out. However, opting out means losing out on both your employer's contributions and tax relief – akin to turning down free money that grows over time. If you decide to opt-out, make sure to obtain and return the opt-out form promptly to ensure any contributions are refunded.
To Stay or Not to Stay?
For most, staying enrolled in a workplace pension is beneficial. Not only are you saving for a comfortable retirement, but you are also essentially receiving extra compensation from your employer. However, if you're in severe financial distress, opting out temporarily could be considered.
Always remember, auto-enrolment is designed to make saving for retirement easier, ensuring you can enjoy your later years with financial peace of mind. If you have old pensions from previous jobs, consider consolidating them into one account with Penny for easy management right from your phone. Happy saving!
