Auto-Enrolment Pensions – what this means for you
In the UK around 12 million people are “under saving” for their retirement or not putting aside anywhere near the amount that they need in order to live comfortably in their later years.
Pension schemes have always been available to employees, however the Government have realised that not enough is being done to encourage individuals to pay in to these funds. With more people facing their retirement in poverty, there is no doubt that the new auto enrolment scheme will get more people planning for their futures.
In a bid to encourage more people to save money for their retirement, the Government has introduced a new law, making it mandatory for employers to enrol their employees into a pension scheme. Until now, it had been up to the individual to decide whether they wish to be part of a pension scheme; however it has become apparent that in times where people are living for longer, at a higher cost, the current maximum state pension of £110.15 a week is simply not enough.
It’s important that as an employer, you understand your obligations. Preparation is the key; you should allow plenty of time to implement the new requirements, and obtain advice if needed. The Pensions Regulator has the power to issue fines for those employers that are non-compliant.
The first step is to find out when your staging date is (i.e. the date on which your legal duties come into effect) which is dependent on the number of employees/workers you have on your books.
You can find out through The Pensions Regulator.
Try and allow at least 12-18 months before your staging date to prepare for auto enrolment, it may take more administration than you realise. You will need to consider whether your staff meet the criteria of ‘eligible staff’ which are:
· Those not already in a pension scheme
· At least 22 years old
· Working part time or full time, and earning more than £9,440 per year
· Anyone aged between 16 and 74 can apply to be eligible, however it won’t be necessary for you to match their contributions.
What you need to do…
It is advisable to nominate a contact that can implement the automatic enrolment; they will be the first point of contact for both you and The Pensions Regulator. Ensure that you consult with your payroll administrator and accountant, as their input is essential for the day to day running of the scheme when it is eventually up and running.
Identify what schemes and policies you already have in place (if any) and review them; any schemes already in place may not meet the statutory provisions, so don’t just assume that your current policies are suitable.
It’s important that you keep your employees up to date, you don’t want to miss any important changes to their circumstances or you may not be fulfilling your statutory obligations. If you’re finding the logistics of the process particularly challenging, you can postpone this process for up to three months, allowing a reasonable time to put the required provisions in place.
On your staging date, or the last day of the postponement period, you will need to assess the earnings and age of each member of staff and identify the duty you owe to each of them, whether they are eligible to be enrolled or not. Even if you’re not automatically enrolling certain members of staff, you will need to inform the Pensions Regulator and may need to state the reasoning behind that.
What it means for an employee’s pay packet…
- A worker who earns £20,000 a year will initially see £114.66 leave their take-home pay packet over a year (£9.55 a month)
- Along with a contribution from the employer and tax relief, this will result in £286.64 a year (£23.89 a month) going into their pension pot
- From October 2018, when the scheme is in full swing, this person will see £573.28 a year leave their take-home pay packet over a year (£47.77 a month), with £1,146.56 added to their pension pot over the year (£95.55 a month)
- This money will be invested. When this person retires, they can use this money to buy an annual pension income called an annuity
When the scheme is in place, the minimum contribution an employee can make is 2% of their gross earnings (1% of which will be your contribution), and the plan is for this to have increased to 8%, of which 3% will be contributed by the employer, in due course. These percentages don’t apply to all salaries paid to workers; it only applies after the minimum salary cap (currently £9,440) and up to a maximum salary limit (currently £42,475).
The final piece of advice is don’t get behind! As an employer, it is your duty to comply with this new law. If you fail to comply with the law, you may face rather harsh fines. Ignoring the Pensions Regulator’s first request alone results in a fixed penalty of £400. ‘Wilfully and persistently’ failing to introduce a scheme face £50 a day fines for those with fewer than five staff, £500 a day for five to 49 staff and £10,000 a day for those with more than 50 workers.
It’s worth making arrangements before it’s too late.