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, although people in the UK are living longer, they are not saving enough to finance their increasingly long retirements.
Auto-enrolment is designed to provide every worker with the opportunity to amass some savings for their old age, whilst helping to shift the onus away from the state and on to the individual. Employers are now obliged to enrol all their employees in a qualifying workplace pension scheme, unless the individual makes an active decision to opt out.
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 (DWP), individuals working in sectors such as hotels, construction, and agriculture were the least likely to save into a workplace pension.
Auto-enrolment began in October 2012, and all companies will have enrolled their staff by April 2017. By 2014, 5.3 million people had been enrolled by over 50,000 employers and it is estimated that, by 2018, about nine million people will have joined a scheme for the first time.
In order to be eligible for auto-enrolment, an individual must live in the UK, must be aged between 22 and state pensionable age, must earn over £10,000 a year and should not already be signed up to a qualifying 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 investment option will be relatively conservative. The pension provider will impose an annual management charge that 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 the government also makes a contribution through tax relief. Each individual will pay in a minimum of 0.8% of their qualifying earnings, rising to 4% by 2018. Their employer will contribute a minimum of 1% of the employee’s qualifying earnings, rising to 3% by 2018. Finally, the UK government will pay 0.2% of the employee’s qualifying earnings, rising to 1% by 2018.