Pension Auto Enrolment

Every worker in the UK, who is between 22 years and the state pension age, earns above the yearly personal allowance and works in the UK will automatically be enrolled in a pension scheme by their employer, meaning that a percentage of their salary will be automatically deducted and added to the pension scheme.

The auto-enrolment was first implemented for some of the largest employers from October 2012 with staff of more than 250, and by 1 February 2014 all large employers will be in the scheme and the auto enrolment for smaller employers will begin to be rolled out in April 2014.
There are two types of pension schemes; defined contribution pension scheme and a defined benefit pension scheme. The type of scheme that employees will be enrolled onto is the decision of the employer.

The Defined contribution pension scheme is a scheme that invests the money, and is sometimes referred to as a money purchase scheme. The investments are made by the provider and they will take a fee as management charges. The total amount of money that the worker will receive once they retire will depend on the following:

How much was paid into the scheme
How long the scheme was being paid into
How well the investment has done

The minimum percentage of investment is decided using a three tier structure. The tiers start from the first £1 of earnings and if Tier 1 or Tier 2 is applied then the pensionable pay needs to be equal to basic pay.

Tier 1 has minimum contributions of 9% of which 4% comes from employer.

Tier 2 has minimum contributions of 8% of which 3% comes from employer.

Tier 3 has minimum contributions of 7% of which 3% comes from the employer.

The Defined benefit pension schemes are salary related schemes, the pension provider promises a set amount payable to the worker each year once they have retired. The amount the worker receives depends on their salary and how long they worked for their employer. The scheme will need to meet certain requirements and either hold a valid contracting out certificate indicating that it is an appropriate replacement for the state second pension or confirm that it provides broadly equivalent or better benefits. Currently the minimum contributions are set at 2% employee contributions and 1% employer contributions of pensionable pay, which is £5,668-£41,450

Regardless of which scheme is chosen all eligible workers will automatically be enrolled onto the scheme and the employer will notify the employee of this. The employee can then decide to opt-out of the scheme. If they opt-out of the scheme within the first month the employee will receive a full refund of the deductions, however if they opt-out after this period the deductions will not be able to be refunded and will remain in the pension fund until the employee is of retirement age.

Geraldine Rowley, September 2013

Posted: 19 September 2013