When retirement planning, you may come across the term auto-enrolment into pension schemes through your employer. This policy was part of the Pensions Act 2008 and was introduced in October 2012. Auto-enrolment is as it sounds: the automatic enrolment of eligible employees into the employer’s nominated pension scheme.

In this article, we’ll discuss the eligibility criteria, contributions and the benefits of these schemes. We’ll also explain what may happen if you leave your place of employment.

Auto-enrolment eligibility

The purpose of auto-enrolment into workplace pension was to boost the financial stability of UK workers in retirement. The government identified that not enough people were savings into private pensions. They were relying on the state pension as their primary income in retirement. By requiring employers to automatically enrol eligible employees into a pension scheme, this reliance on the state pension would be significantly reduced.

To be eligible for auto-enrolment, employees must be aged 22 or above and work primarily in the UK. Their earnings before tax must be £10,000. Whilst employers are obliged to enrol eligible employees into their pension scheme, employees may opt out.

All employees who meet the age and earnings criteria are eligible for workplace pensions. This is the case even if the employee is on parental leave, a short-term contract or a zero-hours contract. Those who are self-employed, or the only director of a limited company with no employees aren’t eligible for workplace pensions.

Workplace pensions contributions

A minimum of 8% of the employee’s salary must be contributed to the workplace pension. 5% of this contribution must come from the employee with the other 3% coming from the employer. It may also be possible for you to increase your personal contributions and your employer may agree to contribute more than the minimum too. Some may even match your employee contributions, offering it as an employee benefit. This can provide a valuable boost your retirement savings.

Benefits of workplace pensions

Workplace pensions have many benefits. As mentioned above, additional to your own contributions to the pension, you’ll also receive employer contributions to your pension. This means your pension pot will grow faster. Your contributions are also eligible for tax relief of 20% from the government, often applied at source. Higher and additional-rate tax payers can claim up to 25% additional relief, depending on your tax bracket*.

Workplace pensions provide a means to save money for your future. This could offer you financial stability throughout your retirement. Contributions to workplace pensions are usually deducted from your pay before it reaches you. You may not even notice the money missing and you’ll be growing your pension pot without feeling the impact financially.

Money contributed to your workplace pension when you turn 22 could have upwards of 45 years to grow**. The impact this has on our portfolio is known as compound interest, where not only the money you invested grows, but the growth it generates also earns additional returns.

What happens to your workplace pension if you leave your job?

If you change roles within the same employer, your workplace pension should remain the same. Leaving the company, however, will mean you are also leaving the company pension. Contributions to this pension scheme, from both yourself and the employer, will stop. Your pension pot, however, will remain invested. This could mean that your money continues to grow without adding further contributions. With investing, the value of your pension could go down as well as up, so it is important to keep track of your pensions. So long as you continue to meet the eligibility criteria with your new company, you will be auto-enrolled into their chosen workplace pension scheme. This will build a separate pension pot for you.

Some pension schemes allow you to continue making personal contributions after you have left the company. These may be regular contributions or a one-off addition. You may be able to transfer your previous workplace pension to the scheme at your new workplace, or to a private pension.

Finding lost pensions

If you have worked for multiple employers since 2012, meeting the eligibility criteria each time, you may find yourself with multiple pension pots. These can be difficult to keep track of, particularly if you move addresses. If you do not inform previous pension providers of your new address, your pension statements will be delivered to your old address. These statements contain useful information, including who your pension is held with and its value.

Should you find yourself in the position of having lost track of your pensions, we may be able to help. Willday Wealth Management have a pension finding service. Simply provide us with information about your previous employers and schemes. We’ll then send enquiries for up-to-date information on your behalf.

Once we have located previous pensions, we will discuss with your whether consolidating the pensions is an effective option. If so, you could save money on management fees. Plus, with a single, larger pension pot to invest, you may have the potential to unlock greater returns on investment**. Read more about the benefits and drawbacks of consolidating pensions in our blog post from last year.

So should you stay enrolled in workplace pensions?

Workplace pensions are a great way to build your retirement funds. With contributions from your employer, and tax relief too, you’ll boost your pension pots at less of a cost to you. In order to have the retirement you dream of, contribute as much as you are able. This is particularly the case if your employer matches your contributions!

Looking to open a private pension alongside your workplace pension? Call us on 0116 222 0119 to discuss your current financial status and retirement plans. We’ll advise you on the best options to achieve your retirement goals.

*You may be entitled to more or less than this amount, subject to your tax status.

**With investing, your capital is at risk and you may get less than what you invested. Tax treatment depends on your individual circumstances and may change in the future.