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How Does Auto-Enrolment Work?

Start Here 5 min readGuide 2
How Does Auto-Enrolment Work?

Auto-enrolment requires employers to automatically enrol eligible workers into a workplace pension. This guide explains who qualifies, what your employer must do and what happens if you opt out.

Quick answer

Auto-enrolment is a legal requirement that means your employer must automatically enrol you into a workplace pension if you are aged 22 to state pension age and earn more than £10,000 per year. You can opt out, but you will lose your employer's contributions and the government tax relief for as long as you are opted out.

What is auto-enrolment?

Auto-enrolment was introduced in 2012 as a way to address the fact that millions of workers in the UK were not saving enough for retirement. Before auto-enrolment, joining a workplace pension was voluntary, and many people simply never got around to it, or felt they couldn't afford to.

The legislation changed the default. Instead of having to actively choose to join a pension, eligible workers are now enrolled automatically. You still have the right to opt out, but inertia now works in your favour rather than against you.

Who is eligible?

Your employer must automatically enrol you if you meet all three of the following criteria:

  • 1You are aged between 22 and state pension age
  • 2You earn more than £10,000 per year (the trigger threshold)
  • 3You work in the UK

If you are aged 16–21 or between state pension age and 74, and you earn above £6,240 per year, you have the right to opt in to your employer's scheme and receive employer contributions, but your employer does not have to enrol you automatically.

Workers earning below £6,240 per year can ask to join a pension scheme, but their employer is not required to make contributions.

What your employer must do

When you become eligible, your employer must enrol you into a qualifying pension scheme within six weeks of your eligibility date. They must write to you within six weeks to tell you that you have been enrolled, which scheme you have been enrolled into, how much you and your employer will contribute and how to opt out if you wish to.

Your employer must also make contributions on your behalf. The minimum employer contribution is currently 3% of your qualifying earnings. Many employers contribute more than this, and some offer enhanced matching if you contribute above the minimum.

Steve

Steve's observation

One of the most common questions I get asked is whether it's worth staying enrolled when money is tight. My answer is almost always yes, and here's why.

Your employer's contribution is effectively part of your pay. If you opt out, you don't get that money back in your salary, it simply disappears. Combined with the government's tax relief, opting out means you are giving up a significant amount of money that would otherwise be working for you.

The only situation where opting out might make sense is if you have very high-interest debt that is costing you more than the pension contributions are worth. Even then, it's worth taking advice before making that decision.

Minimum contributions

Contributions under auto-enrolment are calculated on your qualifying earnings, the band of earnings between £6,240 and £50,270 per year. This means contributions are not calculated on your total salary, but on the portion of your salary that falls within this band.

The minimum total contribution is 8% of qualifying earnings. At least 3% must come from your employer. You contribute the remaining 5%, but because of tax relief, you only actually pay 4% yourself, the government adds 1% on top through basic-rate tax relief.

Some employers calculate contributions on total earnings rather than just qualifying earnings, which can result in higher contributions. Check your pension documentation or ask your HR team to confirm how your contributions are calculated.

Opting out, what you lose

You have a one-month opt-out window after being enrolled. If you opt out within this window, any contributions already deducted from your pay will be refunded. After the window closes, you can still leave the scheme, but contributions already made will remain in your pension pot.

If you opt out, you lose your employer's contributions and the government tax relief for as long as you remain opted out. Your employer is not permitted to encourage or pressure you to opt out, doing so is illegal and can be reported to The Pensions Regulator.

Re-enrolment

Every three years, your employer must re-enrol any workers who have previously opted out, if they still meet the eligibility criteria. This gives people who opted out in the past a regular opportunity to reconsider. You can opt out again after re-enrolment if you choose to.

Pause for thought

  • Do you know whether you are currently enrolled in your employer's pension scheme?
  • Do you know how much your employer contributes on your behalf?
  • Have you ever opted out of a workplace pension? If so, do you know when your next re-enrolment date is?
  • Are you contributing more than the minimum? If not, does your employer offer enhanced matching that you could take advantage of?

Coaching point

If you opted out of your workplace pension in the past, perhaps when money was tight, it is worth reviewing that decision now. Even small increases in your contribution can make a meaningful difference over time, especially when combined with your employer's matching and tax relief.

Key terms

Auto-enrolmentThe legal requirement for employers to automatically enrol eligible workers into a qualifying workplace pension scheme.
Qualifying earningsThe band of earnings on which auto-enrolment contributions are calculated, currently between £6,240 and £50,270 per year.
Trigger thresholdThe minimum earnings level (currently £10,000 per year) at which an employer must automatically enrol a worker.
Opt-out windowThe one-month period after enrolment during which you can opt out and receive a refund of any contributions already deducted.
Re-enrolmentThe process by which employers must re-enrol opted-out workers every three years if they still meet the eligibility criteria.
The Pensions RegulatorThe UK government body responsible for overseeing workplace pension schemes and enforcing auto-enrolment rules.

Frequently asked questions

What to do next

Check whether you are currently enrolled in your employer's pension scheme and confirm how much you and your employer are contributing. If you are not enrolled and believe you should be, speak to your HR or payroll team.

Guide 3 explains the difference between defined contribution and defined benefit pensions, the two main types of workplace pension you might be enrolled in.

This guide provides general information only and does not constitute personal financial, pension, investment or tax advice. Auto-enrolment thresholds and contribution rates are set by the government and may change. Appropriate regulated financial advice should be considered before making significant pension decisions.
What Is a Workplace Pension?Defined Contribution vs Defined Benefit