Pensions auto-enrolment – Pensionfinder
Pension auto-enrolment: What it means for you
As part of its attempts to deal with the looming pension crisis in the UK, and the failure of people to make provision for their retirement, the Governments has introduced legislation that requires all employers to auto-enrol their staff in a qualifying workplace pension scheme. The requirement is due to start in October 2017.
It is thought that many workers do not take advantage of workplace pension schemes simply because they cannot be bothered to join them. Auto-enrolment gets round this problem of inertia by making eligible employees automatically a member of a pension scheme.
How auto-enrolment will work
The rules of auto-enrolment require employees aged between 22 and the State pensionable age, and earning at least £5,035 per year to be auto-enrolled in an existing eligible occupational scheme (such as a final salary scheme or a defined contribution scheme) or the new National Employment Saving Trust (NEST).
In addition to enrolling their eligible staff, companies and employees will also be required to make minimum contributions to their pension plan. These should amount to a minimum total payment of 8% of the employees’ annual salary, with the employer paying at least 3%, the Government giving 1% as tax relief and the employee paying the rest.
If an employee decides that they do not want to become a member of the pension scheme they can opt out of it, by giving notice to their employer of their decision during the opt-out period. However, every three years an employer will be required to re-enrol an opted out member of staff.
If you are self-employed you do not need to auto-enrol in a pension scheme.
Phasing –in auto-enrolment
To help businesses prepare for the administration changes and costs of auto-enrolment the Government has decided to introduce it in stages. The phasing-in of companies will be based on their size and should be completely in place by September 2016. It will start in October 2017, with the largest companies (those with more than 120,000 employees) and should finish four years later.
Contribution payments will also be phased-in between the start of auto-enrolment in 2017 and 2017. Accordingly, between October 2017 and October 2016 a minimum contribution of 2% of earning should be made, with at least a 1% contribution for the employer. The next year the minimum contributions rise to 5%, with at least 2% from the employer. After October 2017 the total minimum contribution rises to 8%, with 3% from the employer.
What this means for employers
If you already have a qualifying scheme, such as a defined contribution scheme, a stakeholder pension or even a Group Personal Pension you can enrol all of your eligible staff in your company scheme providing minimum contributions levels are met. A defined benefit scheme , such as a final salary scheme also qualifies for auto-enrolment assuming it provides a minimum level of benefits.
If you have members of staff that are not eligible to join your existing scheme, but still fall under the criteria for auto-enrolment, you will be required to enrol them in the new National Employment Savings Trust (NEST). Staff who do not meet the criteria (perhaps because they are too young) can still ask to be enrolled. In these cases, the employer will be required to make minimum contributions to their employee’s pension plan.
If you don’t have a company pension scheme you can either introduce a qualifying pension scheme or auto-enrol eligible staff in the new NEST due to be launch in 2017. In either case minimum contributions will need to be made by the employer and employees.
Employers will face detailed requirement to prove that they are complying with the auto-enrolment regulations. They will need to allow for administration, training, IT and set-up costs on top of the contributions costs associated with the regulations. The Government predicts that the administration costs of auto-enrolment will be around £20 per employee for larger firms and £40 to £50 for smaller companies.
The regulations regarding auto-enrolment may be further refined. You may want ask your financial advisor for the latest information when your business starts to prepare for auto-enrolment.
What it means for the employee
If you are between 22 and retirement age and earn more than £5,035 you must either be enrolled in the NEST or an eligible company scheme. However, you can opt out if you want.
The best thing about auto-enrolment is that employees will be able to save for their retirement and benefit from employer contribution – perhaps for the first time.
If you have previously not joined your employer’s pension scheme, you may want to look into joining it now, as you will be auto-enrolled in a scheme soon anyway. The earlier you start, the more you’ll save – so the greater your income should be in retirement.