What is auto-enrolment?

Millions of employees are now saving for their retirement thanks to auto-enrolment. We explain what it is and how it works.

Person checking pension fund on smarphone
(Image credit: Getty images)

Introduced in 2012, auto-enrolment is a government initiative aimed at making workers save for their retirement. It means most employees are automatically enrolled in their workplace pension scheme. We explain what auto-enrolment is, but you can also read more about pensions in our article 'Everything to know about pensions'.

Since its introduction, auto-enrolment has been hailed as a huge success. The proportion of private sector workers saving in a workplace pension scheme has more than doubled from 32% to 75%. A total of 22.6 million employees are now saving for their retirement via auto-enrolment, according to official figures released this week.

It is estimated by the Department for Work and Pensions that auto-enrolment is responsible for adding an extra £28.5bn to the nation’s pension pots every year.

Research by the Pension and Lifetime Savings Association (PLSA) found that you need an income of £10,900 a year to meet the minimum retirement living standard, rising to £33,600 for a comfortable retirement. The state pension is currently £9,420 a year, meaning there’s a shortfall if you rely on the state payout to cover even your minimum living costs. Find out how to check your state pension in our article.

This is why auto-enrolment is so important; it is helping more and more of us contribute to our own retirement savings, so we don’t face pension poverty in later life.

What is auto-enrolment?

Auto-enrolment means all employers are required to provide a workplace pension scheme and automatically enrol qualifying employees into it.

So, when you start a new job, there should be a workplace pension and – provided you are eligible – you will automatically be signed up for the scheme and part of your salary will be paid into your pension each month.

If you don’t want to save into your workplace pension you can opt out, but this is likely to mean you face a shortfall in your income when you retire. It also means you miss out on ‘free’ employer contributions, because when you pay in, so does your employer.

Who qualifies for auto-enrolment?

To be auto enrolled you must:

  • Be aged between 22 and state pension age
  • Earn at least £10,000 a year
  • Work in the UK
  • Be classed as a worker. This basically means you must have a contract, be paid for your work, have work to do and not be able to sub-contract that work

A review of auto-enrolment in 2017 called for the qualifying age to be dropped to 18 and the minimum income to be abolished. The government has repeatedly stated its intention to do both these things, but it has yet to happen.

How much do I have to pay and how do I pay?

Auto-enrolment doesn’t just get you paying into your workplace pension, it also dictates a minimum amount you have to contribute. 

Employees must pay in at least 5% of their salary into their workplace pension scheme. 

This minimum amount is applied to your ‘qualifying earnings’, which is any pre-tax income between £6,240 and £50,270.

The money is deducted straight from your pay packet and put into the pension scheme, so you don’t need to worry about making the contribution yourself.

How much does my employer and the government pay?

You aren’t the only one who must contribute to your workplace pension. Under the law your employer must make a monthly contribution of at least 3% of your qualifying earnings too.

On top of that, the government will also pay into your pension when you do. HM Revenue & Customs adds 20% of whatever you contribute to reimburse you for income tax paid. If you are a higher or additional rate taxpayer, you can reclaim the extra tax you’ve paid on pension contributions via your self-assessment tax return, unless you’ve already received it from the pension provider.

Let’s say you earn £30,000 a year before tax. Under auto-enrolment rules, 5% of your qualifying earnings will go into your pension each month - that would be £99. Your employer must pay in 3%, so that would be a further £59.40. And the government will add £24.75 in tax relief. 

So, you pay just less than £100 and your pension pot receives £183.15, that’s a lot of free cash you’d be missing out on if you chose to opt out.

How much do I need to pay into my workplace pension?

The government lays out the minimum contributions you and your employer must make under auto-enrolment rules. The key word here though is ‘minimum’: there is nothing to stop you paying more into your workplace pension. In fact, it is a very good idea to increase your contributions if you can afford to.

“Whilst automatic enrolment is a great start, contributing at the legal minimum rate is unlikely to generate a comfortable retirement for many people,” said Steve Webb, partner at the pensions consultancy LCP and a former pensions minister. 

“Broadly speaking, there isn’t a ‘right answer’ about how much is enough, but most people are not saving enough, so any increase in savings is a good idea.”

He added: “Make sure you are taking up any ‘free money’ from your employer – in other words if an employer will match extra contributions that you might make, this will be a tremendous way of boosting your retirement pot; many firms will do this, especially larger firms, but workers may not be aware.”

Also consider increasing your contributions when you get a pay rise. “This is the ‘least painful’ time to think about paying more,” said Webb. “At this point you haven’t got used to enjoying your new higher income.”

Who is excluded from auto-enrolment and what can they do if they want to pay into a pension scheme?

You are excluded from auto-enrolment if:

  • You’re aged under 22 or over state pension age
  • You earn under £10,000 a year
  • You’ve handed your notice in
  • You have lifetime allowance protection
  • You’ve already taken a pension arranged by your employer that meets auto-enrolment rules
  • You got a “winding up lump sum” from a workplace pension with your employer within the past 12 months
  • You’re in a limited liability partnership
  • You are a company director without an employment contract

However, you can still ask your employer if you can join the workplace pension if you are aged between 16 and 74. Alternatively, you could start your own personal pension or self-invested personal pension (SIPP) and pay into that instead. However, you won’t receive employer contributions.

What happens if I leave my job?

Your pension belongs to you so if you leave your job your money will remain invested, and you should continue to receive annual statements. When you start a new job, you may find you can transfer your old pension pot into your new one.

What happens to my workplace pension contributions when I’m on maternity leave?

When you go on maternity leave your workplace pension contributions will continue.

“It can be tempting to stop pension contributions during this time but wherever possible keep them going and your employer will also continue to contribute,” said Helen Morrissey, senior pensions and retirement analyst at the investment platform Hargreaves Lansdown. 

“The contribution you pay during this time will be based on your income under statutory maternity pay so will be lower. However, your employer will need to continue paying their contribution based on your salary before you leave.”

Ruth Jackson-Kirby
Personal finance journalist

Ruth is a personal finance journalist with 17 years’ experience writing about everything from pensions to pet insurance. Ruth started her career as a staff writer for MoneyWeek and she continues to edit their personal finance section. Ruth also writes for numerous national publications including The Sunday Times, The Times, The Mail on Sunday and Good Housekeeping. Ruth is passionate about ethical investing and encouraging people to take control of their finances and not be put off by jargon.