Automatic enrolment also known as Auto Enrolment
This new approach to workplace pension savings was introduced by the Government in October 2012 and is being phased in over a period of 6 years.
It aims to encourage all workers – and particularly lower-income and part-time employees –to save for their own retirement, with contributions made through payroll. Compulsory employer contributions and tax relief on employee contributions are included with any contributions made.
The new auto-enrolment legislation requires employers to automatically enrol their eligible employees into a qualifying pension scheme and make contributions on their behalf. The legislation took effect from October 2012 and initially affects the largest employers. Over the following 6 years, it starts to apply to medium and smaller employers on a staged basis. By February 2018, the smallest employers will have to enrol their staff.
Employers who already have a qualifying pension scheme can use it to comply with the new laws or they can choose another suitable scheme if they prefer. In support of the new legislation, a government-funded but independently run national pension scheme, called NEST, has been established. NEST aims to enable all employers to fulfil their new auto-enrolment obligations. NEST is a trust-based, money purchase pension scheme that is run by a board of independent trustees.
The key requirements of Auto Enrolment
||All workers (i) aged between 22 and State Pension Age (ii) earning more than the Individual Personal Allowance (i.e. £ 9,440 a year for 2013/14) and (iii) not already in a qualifying scheme will automatically be enrolled into one. If an employee opts out of the scheme then any employer contributions and Government tax relief are forfeited.|
|Dates of phased contribution
||Total minimum contribution
||Minimum employer contribution
||Minimum employee contribution|
|October 2012 to September 2017
|October 2017 to September 2018
|October 2018 onwards
Government Tax Relief
The Government will add tax relief to the employee’s contribution at a rate equivalent to 25% of that contribution, bringing the total contribution up to the amounts shown above.
|Qualifying Band Earnings
||These are earnings between the Primary Threshold and the Upper Earnings Limit (£5,668 a year and £41,450 a year, respectively, for 2013/14). These earnings include salary, overtime, bonuses and commission as well as statutory sick, maternity, paternity or adoption pay.|
|Very low cost
||The Government wants auto-enrolment schemes to be a good deal for employees. This means the cost of running these schemes needs to be as low as possible. For example, the charges that NEST is deducting are as follows: (i) a contribution charge of 1.8% on each payment made (e.g. a contribution of £100 will result in £98.20 going into your pension pot) and (ii) an Annual Management Charge (AMC) of 0.3% of the value of your total pension fund each year.|