What are auto enrolment pensions?
By now, you’ve heard about auto enrolment pensions.
Auto enrolment ensures that all workers over the age of 22, earning more than £833 per month, are making contributions towards a pension fund.
Saving for the future is important. And, there are many ways to do it.
Most people will accept auto enrolment happily, because of the associated financial benefits. Namely, that auto enrolment contributions are made by both employee and employer. Employers must make minimum contributions to the pension funds of every enrolled employee.
By April 2019, employer contributions will have reached a 3% minimum. For many workers, this is simply ‘free money’.
Whilst most would be making a mistake not to be involved in auto enrolment, these workplace pensions aren’t right for absolutely everyone. Some people feel that their money is better invested elsewhere, and it’s an employee’s right to use their money however they’d like to.
Opting out is an option, but how do you go about it?
Who can choose to opt out?
Anyone can opt out of auto enrolment. No questions will be asked. It’s an employee’s right. But, opting out isn’t permanent.
Employers have an obligation to carry out re-enrolment every 3 years.
Any employee that has opted out will be put back into the pension scheme, whether they have asked to be or not. They’ll then have to opt out all over again.
Employees can choose to opt out just once, or to opt out each time they’re re-enrolled.
When can employees opt out?
There is an ‘opt out period’ for employees. This is the calendar month following auto enrolment.
During this time, an employee can opt out of the scheme and receive a refund of any contributions that they have made.
Employees can’t opt out in advance. They need to be enrolled in the pension scheme before they can choose to opt out.
If employees do not opt out within one month of being enrolled, they may not get their contributions back. Instead they’ll be leaving the pension scheme, and may have their pension preserved.
How does an employee opt out?
To opt out, an employee must give their employer an ‘opt out notice’. This is the official equivalent of an auto enrolment opt out letter.
The opt out notice comes directly from the pension provider. It uses very specific wording.
Pension providers will supply the opt out notice as a valid document, meeting all legal requirements. This ensures that employers cannot tamper with the process, or influence an employee’s decision.
An employee must request the opt out notice. The employer should provide information about the company’s pension provider, if this information is requested. Employees work to tight deadlines if they want to opt out of the workplace pension scheme, which means that they need to know exactly how to contact for their opt out notice.
Once the employee has filled in the form, they should give it to their employer. There may be an option to complete the opt out process online.
What does an opt out notice look like?
The auto enrolment opt out letter template, or the opt out notice, must include specific details.
It needs to contain the employee’s full name. It should also include their date of birth, National Insurance number and the name of their employer.
In addition it needs to feature a signature, or electronic signature, and the date that the form was filled in.
Just above the signature, there are some statements that need to be included. The employee signs to say that they’ve read these warnings, and that they agree with the following:
- “I wish to opt out of the pension scheme”
- “I understand that if I opt out I will lose the right to pension contributions from my employer”
- “I understand that if I opt out I may have a lower income when I retire”
The form also needs to include a ‘what you need to know’ section. This section must include the following statements:
- Your employer cannot ask you or force you to opt out.
- If you are asked or forced to opt out, you can tell The Pensions Regulator.
- If you change your mind you may be able to opt back in – write to your employer if you want to do this.
- If you stay opted out of the scheme, your employer will normally put you back into pension saving in around three years.
- If you change your job, your new employer will normally put you back into pension saving straight away.
- If you have another job, your other employer might also put you into pension saving, now or in the future. The notice only allows you to opt out of pension saving with the employer you name in the notice. A separate notice must be filled out and given to any other employer you work for, if you wish to opt out of that employer’s pension saving as well.
For an opt out notice to be valid, all of the above statements and pieces of information must be included.
What if an employee changes their mind?
When an employee opts out of the pension scheme, any employer contributions will be lost. The employee will get back any of their own contributions.
After three years, re-enrolment will happen automatically. This means that employees will be out of the scheme for a maximum of three years at a time.
If an employee changes their mind about opting out, they should speak to their employer about early re-enrolment. The employer isn’t required to make this happen straight away.
Some employers will re-enrol as soon as they’re asked to. Some won’t. The only legal requirement is that requested re-enrolments are processed at least once a year.
Is there an auto enrolment opt out letter template available?
You’ll find examples of opt out notices online. These show you how the notice should look, but can’t simply be copied from the internet.
To opt out, employees need to contact the relevant pensions provider directly.