Peter from Stowupland asks: “I own a small computer service business employing 30 people and I understand that I will soon have to provide my staff with a pension scheme and pay contributions into it for them. What is auto enrolment and when is it likely to affect my business?”
Pensions in the workplace are changing and legislation has been introduced that will eventually see all employers in the UK having to provide a company pension scheme for their staff. By 2018 every employer in the UK will have to enrol their eligible workers into a Qualifying Pension Scheme and both the employer and the employee will have to make contributions into the scheme. This process is called ‘automatic enrolment’ and eventually it will affect all employers and employees in the UK.
The Government wants to encourage everyone to save for their retirement, to ease the burden on the state pension scheme, and it is putting the responsibility on to employers to help encourage more people to save. As an employer:
n You will be required to automatically enrol eligible employees into a ‘qualifying pension scheme’. This could be your own qualifying company scheme or an alternative from another provider, such as the People’s Pension or the National Employment Savings Trust (Nest).
n You will eventually be required to contribute a minimum of 3% of each employee’s ‘qualifying’ earnings and their own contributions and tax relief will be added to this to meet a minimum of 8% total contributions from 2018. It is possible for you to pay more and the employee to pay less, as long as the total contribution is at least the minimum. For example, if you pay the full 8% your employees will not need to make any contributions.
n You will need to monitor your employees’ earnings to ensure your scheme meets the minimum contribution levels ongoing (a pay cut could reduce the average contribution levels), and you will need to collect employee contributions and pass them to your scheme provider.
n You will be required to re-enrol eligible employees who have ‘opted out’ of the scheme at least once every three years, and you will have to register your scheme with the Pensions Regulator and keep appropriate records.
Auto enrolment has already started for larger firms and at some point between now and 2018 you will have to automatically enrol all eligible employees in a qualifying pension scheme and make contributions to their plan. The date that you will have to do this will depend on the size of your business and number of staff and it is called your ‘staging date’. You can find out your staging date at the web site of the Pensions Regulator at www.thepensions regulator.gov.uk by entering your PAYE reference number into the staging date calculator.
Employees eligible for automatic enrolment will be those who aren’t already active members of a qualifying pension scheme, aged between 22 years and the State Pension age, and who meet the minimum earnings threshold for eligibility, which is the income tax personal allowance of £9,440 in 2013/14. Contributions are only payable on qualifying earnings, which are those between the current minimum threshold of £5,668 and the current upper limit of £41,450.
Employees with qualifying earnings but who are between ages 16 and 21, or over state pension age but under 75, can ask to be enrolled, and you will have to pay in for them if they do. These employees are known as ‘non-eligible jobholders’. Employees without qualifying earnings can also join and make their own contributions, but you won’t have to pay in for them. These employees are known as ‘entitled workers’.
If you intend to use an existing company or group pension scheme to meet auto enrolment requirements, it will have to fulfil certain qualifying criteria.
n Does it permit automatic enrolment? Employees must be automatically enrolled (without needing to fill in application forms) within three months of joining the company?
n Does the scheme have a default investment option? A qualifying scheme must offer a default investment option which recognises the likely characteristics and needs of employees who are enrolled into it. There should be an appropriate balance between risk and return and investment charges should reflect this balance.
n Does it meet one of the minimum contribution tests? If your company scheme passes the required criteria, then it will qualify, but if it does not, then you will need to start up a new qualifying scheme. If you don’t currently provide a staff pension scheme, then you are definitely going to need to start one.
If you are an employer needing advice on starting up a pension scheme to meet the needs of auto enrolment, call us to arrange a free, no obligation initial discussion.
-- Nick Plumb is an Independent Financial Adviser at Plumb Financial Services of Baylham Business Centre, Lower Street, Baylham, Suffolk, IP6 8JP. Tel: 01473 830301 Web: www.plumbfs.co.uk You can send your financial questions to Nick by post or by e-mail to firstname.lastname@example.org. Nick’s answers to reader’s questions as featured within this column are provided only as a general guide and do not constitute financial advice. Any readers who require financial advice should contact Nick to arrange a complimentary initial consultation meeting to discuss their own position. Plumb Financial Services is authorised and regulated by the FCA (The Financial Conduct Authority).