Workplace Pensions and Auto-Enrolment: What 8% Actually Buys
A workplace pension is the scheme your employer must enrol you into under auto-enrolment if you are aged 22 to State Pension age and earn over £10,000 a year. The legal minimum contribution is 8% of qualifying earnings — at least 3% from the employer, the rest from you, topped up by tax relief.
Qualifying earnings are not your whole salary: the minimum is calculated on the band between £6,240 and £50,270. On a £35,000 salary that band is £28,760, so the 8% minimum is about £2,300 a year — roughly £860 from the employer and £1,440 from you, of which £288 is tax relief. Many employers pay more than 3%, and some match up to 5% or 6% if you increase your own contribution; that match is the highest guaranteed return available anywhere.
You can opt out, but you will be re-enrolled every three years, and opting out forfeits the employer money. Staff outside the eligibility rules — under 22, over State Pension age, or earning between £6,240 and £10,000 — can ask to join and still receive the employer contribution. The government has legislated to lower the age to 18 and count earnings from the first pound, with the start date still to be set.
How the contribution leaves your pay changes what it costs you. Under salary sacrifice you give up pay before tax and National Insurance, so you save 8% NI as well as income tax and your employer saves 15% employer NI — some pass part of that on. Under net pay you get full relief through payroll. Under relief at source the scheme claims 20% and higher-rate taxpayers must claim the rest through self-assessment, which many never do.
The default fund is where most people stay, and it is usually a lifestyle or target-date fund that shifts from equities to bonds as you approach the scheme's retirement age. If that age is wrong — set to 65 when you plan to work to 70, or vice versa — the de-risking happens at the wrong time. Charges are capped at 0.75% in default funds, but the fund's equity share and its assumed retirement date are choices worth checking once.
Every job leaves a pot behind. The average worker has several small pensions by their forties, and the Pensions Dashboard, once live, will list them; until then the Pension Tracing Service and old payslips find them. Consolidating into one workplace scheme or a SIPP simplifies things, provided you are not giving up a guaranteed annuity rate or a defined benefit promise in the process.
Richify reads each payslip's pension line, tracks every old pot alongside the current one, and shows what raising your contribution by one percentage point does to your retirement date.
