By John Lawson
About 15 years ago, the government realised that persuading some people to save for retirement was like pushing water uphill. Only about half of those with the opportunity to join their employer’s pension scheme did so.
So, from 2012, a system of ‘automatic enrolment’ was introduced. Automatic enrolment simply means that if you earn enough (and are old enough) your employer must add you to their pension scheme automatically. You can choose to opt-out if you want, but the default is that you will be saving for retirement.
This simple behavioural change now means that 90% of eligible employees are saving via their employer’s pension scheme.
So, who’s not eligible?
There are a few groups of people who are not automatically enrolled:
- Employees earning less than £10,000 or people with more than one job, where they don’t earn more than £10,000 from any of their employers.
- Employees under age 22 or over state pension age (currently approximately age 65)
- Self-employed people
- Those who don't have any earnings
Even if you are not automatically enrolled, there is nothing to stop you from paying into a pension – but you might not be entitled to an employer's pension payment.
Self-employed people and those without earnings don't have an employer, so they don't qualify for any extra payments on top of their own.
However, everyone under the age of 75 is entitled to tax relief on their pension payments of at least 20%, even if they don't have earnings or pay tax. Non-earners can pay in up to £3,600, which includes tax relief of £720, so the net cost of having £3,600 paid into your pension is only £2,880.
Those with earnings, or in the case of the self-employed, profits, can generally make personal payments into their pension of up to 100% of taxable earnings or profits (or £3,600 if less).
Employees who are not automatically enrolled
If you're under 22, you can still decide to join your employer's pension scheme voluntarily. Even better, if you earn at least £6,136 a year (£6,136 from April 2019), your employer must make payments into your pension in addition to your payments.
The same rules also apply to people over state pension age but under age 75. But those aged 75 and over don't have a right to join or get tax relief.
If you're within the eligible age band of 22 to state pension age, but earn less than £10,000, you can also decide to join. Like those under 22 and over state pension age, you also have a right to an employer's pension payment if you earn at least £6,032 (£6,136 from April 2019).
These are the minimum legal requirements placed on employers, but you may find that your employer is more generous. Some employers enrol all of their employees into a pension, regardless of age or earnings and make payments into your pension fund, even if you earn less than £6,032.
Check with your employer what their policy is.
How much do you have to pay in and how much will you get from your employer?
The minimum payments from both employees and employers are based on a band of earnings between £6,032 (£6,136 from April 2019) and £46,350 (£50,000 from April 2019).
Up until 5 April 2018, you were required to pay in 1% of your pay that sits within this band – for example, if you earn £20,000, your minimum payment would be 1% of £13,968 (£20,000 less £6,032). Your employer was also required to pay in 1% of your pay within these limits. In total, payments were 2% of your pre-tax or ‘gross’ earnings within the band.
From 6 April 2018 until 5 April 2019, you have to pay in 3% of your earnings and your employer pays 2%. In total, payments will be 5% of your gross earnings within the band.
From 6th April 2019 onwards, you have to pay in 5% of your earnings and your employer will pay in 3%. In total, payments will be 8% of your gross earnings within the band.
These amounts include tax relief, so the net cost coming out of your pay packet will usually be less than the full amount. For example, if 5% of your gross pay equals £100 a month, the net cost to you will usually be just £80. The net cost to you could be as low as £55 (for a £100 gross contribution) if you pay tax at higher rates.
Again, these payments are the legal minima. Some employers are more generous and will match what you pay in – for example, if you pay in 5% of your gross pay, your employer will also pay in 5%.
Another way that employers might be more generous is that they won't ignore the first £6,032 of your earnings and, instead, make payments from the first £1 of your earnings. In this case, they will usually ask you to make your own payments from the first £1 of earnings too.
Check with your employer how they calculate your pension payments.