You may have seen adverts or articles in recent months about employers offering pension schemes to their employees. This new legislation will affect everyone, whether you are an employer or an employee, so how does this impact on you?
What is auto enrolment
The government has introduced this new law to make it easier for people to save for their retirement. It requires all employers to enrol their workers into a 'qualifying workplace scheme' if they are not already in one.
Employers have to automatically enrol workers who:
- Are not already in a qualifying workplace pension scheme;
- Are 22 years of age or older
- Are below state pension age (this will vary from person to person)
- Earn more than £8,105 a year (based on tax year 2012/13)
- Work in the UK
Even if you do not qualify to be automatically enrolled, you still have the right to join the scheme. If you tell your employer that you would like to opt in to the scheme, they must allow you to do so.
Initially, contributions will be based on ‘qualifying earnings’ and start from a rate of 1% of qualifying earning’s from the employee and 1% from the employer. They will then increase over the next 5 years to 4% employee (plus an additional 1% tax relief paid by the government) and 3% employer. The maximum annual contribution per member is £4,400.
Employees can opt out of the scheme, but if they do the employer has no obligation to make a contribution for them.
What does it mean for employers?
Every employer in the UK (no matter how many people they employ), has a ‘staging date’ by which they must have a qualifying scheme set up.
Employers must pay a contribution to each employee’s pension plan. They can elect to pay the full amount (initially 2%), but it is likely that many employers will insist that the employee pays the statutory minimum (initially 1%, rising to 4% by 1st October 2017).
The monetary cost is not the only issue. The employer is also responsible for choosing the scheme and administering it. Duties include registering the scheme, keeping detailed records, filing annual reports, making the monthly pension payments, identifying which workers are required to be entered in to the scheme, re-enrolling any member who has opted out of the scheme (this must be done every 3 years from the date the member opted out) and providing factual information about the pension scheme.
However, employers must be careful not to give financial advice (i.e. recommendations) to their employees.
Any employer failing to comply with the new auto-enrolment rules will face penalties. After initial warnings, and subsequently flat rate fines, a daily fine for continued non-compliance will be incurred.
One of the key considerations for employers is whether to deal with the duties, implementation and administration themselves, or seek the services of other professionals such as qualified financial advisers or payroll providers.
What does it mean for employees?
Employees will be automatically enrolled into a pension scheme by their employer and will remain in the scheme unless they choose to opt out.
Employee contributions to the scheme will be deducted directly from salary and invested in an investment fund of the members choice. Investment fund options will be dependent on the scheme but will offer a range of options to suit various attitudes to risk – from cash deposits to stocks and shares.
As a general rule, pension monies can be used to provide benefits at any age from 55 onwards, although there may be exemptions for certain industries or people in ill health.
If an employee leaves a company, the pension pot will still be accessible once they reach 55, but the employer contribution will stop. However, upon joining a new employer the employee will be auto-enrolled into the pension scheme of their new workplace.
Everyone’s individual circumstances will be different, so whether or not an employee should opt out of their workplace pension scheme will vary from person to person. However, in many cases if the employee does not pay the minimum contribution then the employer will also not contribute. This means if the employee does opt out of the scheme, they are giving up a monetary payment and potentially losing out financially.
By making the minimum personal contribution, the employer is then obligated to also make a minimum contribution. It makes it easier if people take time to see the pension contribution as part of their salary and consider that by contributing to the pension, the employer will still effectively be paying them even after they retire.
The legislation surrounding this topic and pensions in general is complex and this text is designed to provide a brief guide to some of the important features of auto-enrolment. Consequently, there may be areas that affect you that are not covered here.
If you would like further details or additional information, please contact David Cole of Aquila Financial Services on 01226 231 241, 07702 804 297 or firstname.lastname@example.org
All information is correct at the time of writing but subject to change. Aquila Financial Services is authorised and regulated by the Financial Services Authority, FSA number 539133.