Pensions are Coming!
Pensions are always in the news: we are not saving enough for retirement; a third of Britons believe they will never fully retire; and auto-enrolment will affect more people than any pension reform since the National Insurance Act 1946.
A third of workers currently make no pension provision, but this will change. Auto-enrolment has already created 1.6m new pension savers. Next year, another 2m will be enrolled. Only the 4.2m self-employed will be left out.
Additional pension contributions will cost employers and staff about £3.2 billion annually in contributions, with administrative costs on top.
Instead of opting into a pension scheme, workers will be enrolled automatically, unless and until they take an active decision to opt out.
Who is affected?
All employers (however small) and all ‘workers’, aged between 22 and state pension age, who are not in an existing qualifying scheme and who earn above the basic personal allowance, currently £9440. Self-employed ‘workers’ (those entitled to holiday pay) must be auto-enrolled, but not the ‘genuinely’ self-employed. No application form is required. Other job-holders must be given information, so that they can opt in if they wish.
Employers can postpone auto-enrolment for up to three months after a new worker is employed, unless a worker opts in during this period.
Auto-enrolled employees must be provided with certain information, including an opt-out notice, but employers commit a criminal offence if they induce staff to opt out. So far, only 9% or eligible workers have opted out.
When does auto-enrolment start?
This depends upon the number of people in an employer’s PAYE scheme. There are a series of ‘staging dates’ so that, for example, an employer with 50 to 53 employees has a start date of 1 April 2015. You can find your staging date by entering your PAYE reference on the Pensions Regulator’s website:
If two employers merge and both employers retain their existing employment contracts, the staging date is that of the largest employer.
What about costs?
Initially, employer and employee each contribute 1% of qualifying earnings (currently between £5,668 and £41,450), although there is scope to use a different definition of pensionable salary. Total contributions for a worker on £30,000 a year will be £600. This will rise in stages to 8% of salary, £2400. Of this 8%, the employer must contribute at least 3%. The employee receives tax relief on contributions.
Employers without an existing qualifying pension schemes will incur considerable extra administrative costs.
Which schemes can you use?
There are three main alternatives to traditional pensions, designed to be low cost, money purchase schemes: ‘NEST’, ‘the people’s pension’ and ‘NOW Pensions’.
Summary of Action Points for Employers
- Check your staging date (you can postpone enrolment 3 months beyond this)
- Identify who you need to auto-enrol (including ‘workers’)
- If you have no existing qualifying scheme, decide which scheme you will use
- Set up your scheme and register with the Pensions Regulator
- Consider salary sacrifice, which is tax efficient for employers and employees
- Prepare communications with staff and revise employment contracts as necessary
- Budget accordingly
- Prepare sooner rather than later!
Don’t underestimate the costs
Surprisingly, the cost of administration can exceed the cost of pension contributions, even for larger employers. This is a regulatory burden which is massively disproportionate for smaller firms. You have been warned.
Geoff Bignell, Chairman, Just Employment Solicitors.