Auto enrolment pension explained — how workplace pensions work in the UK

Since 2012, UK employers have been legally required to automatically enrol eligible workers into a workplace pension scheme. This policy — known as auto-enrolment — was introduced to address the fact that millions of people were not saving enough for retirement. Today, more than 22 million people in the UK are enrolled in a workplace pension as a result.

Yet despite being in a pension, many people have little idea how it actually works, how much goes in, or what they can do to make the most of it. This guide explains the basics.

What is auto-enrolment?

Auto-enrolment is a legal requirement for employers to automatically enrol eligible workers into a workplace pension scheme. Rather than having to opt in, you are placed into the pension by default — though you can choose to opt out if you wish (more on that below).

The policy was phased in from 2012 and now applies to virtually all UK employers, regardless of size.

Who is eligible?

You are eligible to be automatically enrolled if you meet all of the following criteria:

• You are a worker (employed or a worker on a contract)
• You are aged between 22 and State Pension age
• You earn above the earnings trigger threshold — currently £10,000 per year (check gov.uk for the current figure)
• You work in the UK

If you earn between £6,240 and £10,000 per year, you are not automatically enrolled but you have the right to opt in and your employer must contribute if you do so. If you earn below £6,240, you can ask to join a pension scheme but your employer is not required to contribute.

These thresholds are reviewed periodically by the government. Always check current figures at gov.uk.

How much goes into your pension?

Auto-enrolment sets minimum contribution levels based on your qualifying earnings — your earnings between the lower and upper qualifying earnings limits set by the government each year.

The current minimum total contribution is 8% of qualifying earnings, split between you and your employer:

• Minimum employer contribution: 3%
• Minimum employee contribution: 5% (which includes tax relief)

Some employers contribute more than the minimum, and some will match additional contributions from employees above the minimum level. It is always worth checking what your employer offers — additional contributions from your employer are effectively additional pay.

Tax relief means that pension contributions cost you less than the headline figure. A basic rate taxpayer contributing £80 from their take-home pay effectively puts £100 into their pension, because the government adds £20 in tax relief. Higher rate taxpayers can claim additional relief through their tax return.

What kind of pension is it?

Most auto-enrolment workplace pensions are defined contribution (DC) schemes, also called money purchase schemes. This means contributions go into a pot invested on your behalf, and the value of your pension at retirement depends on how much has been paid in and how the investments have performed over time.

This is different from older-style defined benefit (DB) or final salary schemes, where your retirement income is based on your salary and length of service. These are now rare in the private sector.

Can you opt out?

Yes. You can opt out of your workplace pension if you choose. However, doing so means giving up your employer's contributions — which is essentially giving up part of your pay. Most financial guidance suggests that opting out is rarely in your financial interest, particularly if your employer contributes more than the minimum.

If you opt out within the opt-out window (usually one month from being enrolled), your contributions will be refunded. If you opt out later, your contributions stay in the pension until you reach retirement age.

Your employer is legally required to re-enrol you every three years if you are still eligible, even if you have previously opted out.

What happens to your pension when you leave a job?

When you leave an employer, your pension pot remains invested and continues to grow (subject to investment performance). You do not lose your pension — it belongs to you. You can usually transfer it to a new pension with a new employer, or leave it where it is.

Many people build up multiple small pension pots throughout their working lives. The government's pension tracing service (gov.uk/find-pension-contact-details) can help you locate lost pensions from previous employment.

How can you increase your pension?

If your employer offers matching — where they match additional contributions above the minimum — contributing enough to get the full match is generally considered one of the best financial decisions you can make. Beyond that, you can make additional voluntary contributions (AVCs) directly to your workplace scheme or contribute to a personal pension (such as a Self-Invested Personal Pension, or SIPP).

Annual allowances and tax relief rules apply to pension contributions. Check current limits at gov.uk or hmrc.gov.uk.