A guide to auto enrolment

1. Introduction to auto enrolment

Definition and overview

Pension auto enrolment was introduced in the UK through the Pensions Act 2008, as a means to get more people saving more money for their retirement through a workplace pension. 

The act requires employers to automatically enrol eligible employees into a workplace pension scheme. Both the employer and the employee contribute regularly to each worker’s pension account, while the government also makes contributions to it in the form of tax relief. 

Historical context and legislation background

Traditionally, only some businesses offered a workplace pension scheme, and if your employer wasn’t among them then the onus was on you, as an individual, to save for retirement through a personal (‘non workplace’) pension.

The State Pension has existed for some time but was only ever intended to be a welfare benefit, without any guarantee that on its own it would meet the cost of living in retirement. At the same time, an ageing demographic means that people are living longer and that older people make up an increasing proportion of the population. Auto enrolment was introduced to help the government tackle the rising costs of providing the State Pension and to help people save more, so that they could have more money in retirement.

Employees working at their desks in an open plan office

Auto enrolment came into effect in October 2012, starting with large and medium-sized employers implementing the policy amongst their workforce. By June 2015, the new workplace pension legislation included smaller and micro-sized employers. The rollout was completed in February 2018. The law dictates that an employer must provide a workplace pension and automatically enrol any eligible employee on their first day of work. This is known as the employer’s duties start date.

2. Eligibility and enrolment

Setting up a pension scheme

If you own or run a business and are taking on employees for the first time, by law you’ll need to not only set up a workplace pension scheme, but also make qualifying employees members of it. The Pensions Regulator’s website can help you with this, or you can get advice from an independent financial adviser or your accountant. 

How long it takes to set up a workplace pension will depend on the provider, but with an online platform like Smart Pension you can have your workplace pension set up quickly and easily.

Employee eligibility criteria

Employees are eligible to be auto enrolled into their workplace pension scheme if they:

  • are not already in a workplace pension
  • are aged between 22 and the State Pension age
  • are earning more than £10,000 a year
  • usually work in the UK

The process of auto enrolment

If you’re an employee, your employer will need to assess you against the criteria above when you start work for them. If you’re eligible, your employer must enrol you into the workplace pension on the first day of your employment. They must then make regular contributions towards your – and your colleagues’ – pension savings at every pay period, whilst also carrying out various other legal obligations on an ongoing basis. (See Chapter 3 – Responsibilities and Duties of Employers for more on this.)

Postponement

Your employer has the right to postpone auto enrolment for up to three months, for all or some of its employees should they wish, but by law they must inform you that they are doing so. This is known as postponement. However, as an employee you would still have the right to request to join the scheme during this period and, depending on how much you earn, your employer may also make contributions during this time.

Opting in and opting out

Once automatically enrolled into the workplace pension scheme, you can choose to opt out of it if you wish. You have up to one month from the date you become an employee of the company to opt out of the scheme. This is known as the opt-out period. 

You can choose to leave the scheme after the opt-out period. However, whether any contributions are refunded to you will depend on the pension scheme’s rules. Any contributions not refunded will remain invested. You can request to opt in again at any time, but your employer only has to accept your request once every 12 months. 

Even if you have opted out or choose to cease your membership, your employer will normally re-assess your eligibility and put you back into the scheme once every three years if you qualify. This process is known as re-enrolment.

3. Responsibilities and duties of employers

Eligible jobholderNon-eligible jobholderEntitled worker
Agebetween 22 and State Pension age between the ages of 16 and 74  between the ages of 16 and 74
Earningsmore than £10,000 a year between £6,240 and £10,000 a yearearn less than £6,240 a year

Initial assessment of the workforce

Employers will need to assess their workforce to decide which category each individual falls into. In every case, an employer’s auto enrolment obligations will vary, depending on whether the employee is classified as an eligible jobholder, a non-eligible jobholder or an entitled worker.

Eligible jobholders

If you are an employee who is eligible to be automatically enrolled into a workplace pension, you’re known as an eligible jobholder. To be an eligible jobholder, you must be:

  • aged between 22 and State Pension age
  • earning more than £10,000 a year
  • usually working in the UK

Non-eligible jobholders

If you are between the ages of 16 and 74 and earn between £6,240 and £10,000 a year, you are what is known as a non-eligible jobholder. In this case, you would not be automatically enrolled into the workplace pension scheme, but you can request to join it if you wish. If you are a non-eligible jobholder and you join the scheme, your employer must make contributions to your pension savings.

Entitled workers

If you are between the ages of 16 and 74 and earn less than £6,240 a year, then you are referred to as an entitled worker. In this case, you would not be automatically enrolled into the workplace pension but you can request to join it if you’d like to. In this scenario, your employer can choose whether or not to make contributions towards your pension, as it’s not mandatory for them to do so.

Ongoing employer auto enrolment duties

Once an employer has set up a workplace pension scheme and enrolled any eligible staff, they will have to comply with various auto enrolment duties on an ongoing basis. These responsibilities include:

Monitoring employee details

These include the ages and earnings of staff. Once employees meet the age and earnings thresholds that qualify them for automatic enrolment, they must be automatically enrolled into the workplace pension scheme.

Managing requests to join or opt out/leave the pension scheme

If any employees ask to join the scheme, their employer must enrol them into it within one month of receiving their request. The initial period for opting out is one calendar month from the duties start date.

Maintaining contributions

Employers need to ensure that pension contributions are paid at every pay period, and any missed contributions must be back-dated.

Keeping employee records

Information such as the names and addresses of the employees who are enrolled in the workplace pension scheme, and when contributions have been made, must be kept on file for a specified period of time.

Re-enrolment and re-declaration

Once every three years, employers are required to reassess their workforce for re-enrolment. As part of this process, any employees who opted out or left the pension scheme previously will be put back in if they are still eligible. As part of re-enrolment, employers must also resubmit a declaration of compliance to The Pensions Regulator.

Penalties for non-compliance

If you are an employer, it is important to meet your auto enrolment obligations. Failure to do so could result in enforcement action including a fine. The Pensions Regulator can conduct investigations if they suspect non-compliance and, where necessary, go through the courts to support their investigations. 

The regulator has the authority to ask you for voluntary information as well as to issue formal notices requesting information, and also has the right to carry out inspections of an employer's premises. 

If employers continuously fail to comply with their auto enrolment duties, such as paying late or incorrect levels of contributions, the fines issued will start to escalate. The Pensions Regulator can go through the courts to recover any unpaid fines. If, after being issued multiple fines, there is a continued disregard for compliance, employers risk facing prosecution and even imprisonment for up to two years. 

Visit The Pensions Regulator’s website for more information on warnings, notices and payments of fines.

Communication with employees

Ongoing communications with employees are part of your employer’s auto enrolment duties. Employees must be informed about auto enrolment and how it affects them within six weeks of the duties start date, which should be the date they joined the company. Employees must also be given information on how to opt out of the pension scheme and how to opt back in again.  

Two happy employees sitting face to face in a casual meeting

An employer must not ask or force employees to opt out of a workplace pension scheme. Employers must also not unfairly dismiss or discriminate against employees for being in a workplace pension scheme. If an employer is found to be doing so, they can face enforcement action and a fine. An employer must also inform any employee who has not been enrolled into the workplace pension scheme (due to ineligibility) that they can opt in and join the scheme. 

Other statutory communications include opt-in and opt-out confirmations, ‘new joiner’ notices  and details about re-enrolment.

4. Pension scheme contributions

Employer and employee contribution rates

There is a legal minimum amount that you and your employer must, between you, contribute towards your pension. This is known as the total minimum contribution and is expressed as a percentage of your earnings. It’s currently set by law at 8%.

Currently, your employer must contribute at least 3% of your earnings towards your pension, while you have to make up the remaining 5%. Your employer may choose to pay more than 3%, but if the amount they put in is less than 8% then you will still need to make up the shortfall in order to meet the total minimum contribution amount of 8%.

The contributions made to your pension are invested on your behalf – in savings products and financial markets, such as company shares on the stock exchange – by the scheme provider.

Employee contributionsEmployer contributionsTotal contributions
5%3%8%

Tax implications and benefits

If, as an employee, you pay Income Tax and you’re making contributions to your pension, the government will usually make an extra contribution to your pension savings in the form of tax relief. 

Effectively, therefore, there are four ways in which your pension savings grow over time – your own ongoing contributions, the contributions regularly made by your employer, tax relief from the government, and growth in the investments your pension provider makes with the money you save.  

HM & Revenue Customs

When the time comes to withdraw your pension savings, you can usually take 25% of them tax-free. If you take out any more than 25% of your savings as a lump sum, the rest will be subject to Income Tax.

While you’re working, your employer or the scheme provider will usually claim tax relief on your pension contributions for you, through one of two ways – either a net pay arrangement or relief at source.

What is a net pay arrangement?

If your employer offers a net pay arrangement, it means that the contributions you make to your pension are deducted ‘gross’ – they are taken from your salary before you are taxed. As a result, you’ll only need to pay Income Tax and National Insurance on the ‘net’ remainder of your earnings (minus the pension contributions), which is usually less and may therefore save you money every month. 

Smart Pension uses a net pay arrangement, rather than a relief at source method. 

​What is relief at source?

An alternative system is what HMRC calls ‘relief at source’. In this arrangement, your employer will arrange for your pension contributions to be taken from your ‘take home’ pay after your salary has been taxed in the normal way (with deductions for Income Tax and National Insurance).

Whichever system your employer uses, if you pay Income Tax at the basic rate (20%) then your pension provider will top up your pension contribution by 20% (the same amount as tax relief) and claim that back from HMRC. 

Please bear in mind that if you earn enough to put you into an Income Tax bracket higher than the basic rate, you may have to claim the additional tax relief directly from HMRC yourself, usually through a self-assessment tax return.

If you need further information about tax relief on workplace pension contributions, see HMRC’s Pensions Tax Manual.

5. Scheme selection criteria

Aside from whether it meets the qualifying criteria and the minimum requirements, when choosing which workplace pension scheme and provider to use for auto enrolment, there are several factors employers should consider. These include:

Costs

How much will it cost to set up the pension scheme, and will the provider charge a set-up fee for any systems, software, membership or processes that may need to be implemented?

Charges

Once the scheme is up and running, how much will both the employer and employees have to pay for the ongoing management of the workplace pension scheme? 

Payroll compatibility

Will the payroll system you are using (or intend to use) integrate with your pension provider’s software and systems – and at what cost?

Communications

How will the communications to employees be handled? Will the onus be on the employer, or does the pension provider offer this as a service?

Tax relief arrangements

Will your own payroll software and your provider’s systems support a net pay or relief at source arrangement?

Investment options

What types of investment funds are available and does the provider offer funds that will cater to different needs, such as ethical, sustainable or Shariah-compliant funds?

Ease of set-up and use

How simple is the scheme to set up and run on a day-to-day basis, and how much will an employer need to do to meet their legal auto enrolment obligations?

6. Employee perspectives and considerations

Understanding the benefits of auto enrolment

The driving force behind auto enrolment was that the government had found that too few people were saving enough for their retirement. You may well receive the State Pension when you retire (provided you have paid enough in National Insurance contributions while working), but it isn’t enough for most people to live on comfortably in retirement. 

Saving into a workplace pension through auto enrolment will help you to become more financially secure when you retire from the workplace. 

The benefits of doing so include:

  • Your employer pays into your pension, alongside your own contributions.
  • Most savers will also qualify for tax relief on their pension contributions – effectively a free bonus from the government to encourage you to save.
  • More growth potential – a pension is designed to provide long-term growth for your savings, and the money is invested in a range of financial products and funds. As such, you can expect your savings to grow much more quickly than if they were left in a savings or deposit account.
  • The tax incentives include the option to take 25% of your pension savings as a tax-free lump sum when you reach retirement age.
  • Most of the day-to-day administration of your pension savings is looked after by your employer and the scheme provider.

Decisions about contribution levels

You can choose to pay more than the required minimum percentage levels into your pension if you would like to. In some cases, your employer may well do the same. You may also find yourself in a situation where you’ve come into some extra money – for example, an inheritance or work bonus – and would like to invest some of that money into your pension. 

A person updating their Smart Pension contribution levels on a laptop

Whether it’s increased regular contributions or simply a one-off payment, remember that pension saving is based on the promise that the more money you put in while you’re working, the more money you’ll get out when you retire, too.

Having an understanding of how much money you’ll need in the future for your retirement can help you to work out how much you should be saving into your pension on an ongoing basis. Tools like Smart Pension’s retirement needs calculator can give you a rough estimate of how much you should be saving into your pension, and help to get you on course for a comfortable income when you retire.

Opting out – implications and considerations

When you start a new job, you have one calendar month to opt out of your employer’s workplace pension scheme. If you do so, you will be entitled to a full refund of any pension contributions made. 

You cannot opt out of the scheme before being automatically enrolled or after one month of being enrolled. Instead, if you don’t want to remain a member of the scheme, you can choose to cease your membership from it but you may not get any contributions back. In that case, the money in your pension will remain invested. 

It’s important to consider, as an employee, what you could be losing out on by opting out of and leaving your workplace pension scheme. Notably, you won’t be entitled to receive any pension contributions from your employer or any tax relief from the government.

7. Accessing your pension savings

When can you access the money in your pension?

You will usually be able to access your workplace pension savings from the age of 55, whether or not you have chosen to retire from working. You may be able to access them earlier if you are suffering from ill-health – if this is the case, check your pension scheme rules. 

The rules are different when it comes to accessing the State Pension. Current legislation says that the State Pension age is 66 years old, for both men and women, although this is set to increase gradually from 2026 onwards.

What are the options for accessing your pension?

It’s important for you to understand all the different options available to you when it comes to withdrawing the money you have saved for retirement. For more information on some of the ways you can access your pension savings, have a look at Chapter 5: Retirement and accessing your pension, from Smart Pension's A guide to workplace pensions

Ultimately, everyone’s financial circumstances at retirement will be different and, just like any large financial decision, there will be various factors to consider in weighing up which option will be best for you. That’s why it can be a good idea to speak to an independent financial adviser. Alternatively, you can book an appointment with Pensionwise, who will talk you through your options for taking your pension savings.

Broadly speaking, most pension schemes will allow you to withdraw a lump sum on a tax-free basis when you reach retirement age. You can usually take 25% of your savings tax-free, but if you wish to withdraw more than 25% as a lump sum then you may incur a tax liability. You can also choose to use some or all of your savings to buy a guaranteed income for the rest of your life (also known as an annuity). Another option to consider is an income drawdown, through which you access your savings as and when you need them, whether as a single lump sum and/or a series of smaller amounts.

Bear in mind, too, that when you reach retirement age, you may find that you want to keep working and/or that you don’t actually need to access your pension savings right away. In this case, you may wish to keep your savings invested, giving them even more time to grow. 

Discover Smart Retire

Developed by Smart, Smart Retire is an innovative retirement product that is designed to guide you through your retirement journey by giving you a range of customisable options. It’s effectively a digital dashboard, similar to online banking, that gives you financial flexibility once you’ve retired from the workplace. 

A person using the Smart Retire app on a mobile phone

With Smart Retire, you can:

  • get a regular income for some or all of your retirement
  • put money aside to access when you need it, or to pass on as an inheritance
  • take 25% as tax-free cash when you join
  • use our investment strategies to help your money grow
  • adapt the plan as much as you like, as your needs change

To learn more about Smart Retire, visit smartretire.uk.

8. Further information

Our A guide for workplace pensions offers more information about workplace pensions.

If you’re an employer and would like to know more about workplace pensions, visit the Smart Pension website where you’ll find details on how to set up a workplace pension scheme. If you are considering moving your scheme from your current provider to Smart Pension, you’ll also find information about how to switch your pension provider

If you are a financial adviser, please visit Smart Pension’s dedicated adviser page. Alternatively, if you’re a payroll service provider, you’ll find more information on the Smart Pension website about how to set your clients up with our online platform.