Once again, pensions are in the limelight. This time, the Government are soon to be rolling out an auto-enrolment plan for pension contributions.
Pensions and Auto-Enrolment - what is this and what does it mean?
The Government's intention for sometime has been for all employees to have a work-based pension and to save money for their retirement. However, this has not yet been achieved and new pensions requirements for employers are now coming in on 1 October 2012 to work towards this goal. This date applies to the largest employers only, therefore please see below "gradual introduction of auto-enrolment" which will help you confirm what date will be relevant for your business.
What are the new requirements?
- Enrol eligible workers into a qualifying workplace pension arrangement; and
- Choose the qualifying scheme and make contributions into it.
What happens to existing pension schemes?
- Employers will continue to have an ongoing duty to maintain qualifying pension provision for workers who are already members of qualifying schemes.
- If you do not already have a pension scheme in place that meets the government requirements, then the government "NEST" scheme is a new low cost scheme that all employers can use. Note that other schemes are expected to also become available and we can advise you of these once details are available.
Gradual introduction of "Auto-Enrolment"
- Requirements for employers are to be introduced gradually over the next three years and will be based on the size of the employer. Auto-enrolment will be staggered depending on the number of employees you have, for example:
- employers with between 90 and 149 employees will be expected to join from June 2014;
- employers with between 50 and 89 employees will be expected to join from July 2014;
- employers with less than 50 employees will be expected to join between August 2014 and
- February 2016 depending on their PAYE reference number. For further details please
click here (source: Pensions Advisory Service).
Which employees must be included?
- You must enrol those employees aged between 22 and state pension age (an increasing 65+ for men and an increasing 60+ for women) who earn above the income tax personal allowance (£7,475 in 2011/12).
- Contributions become payable on earnings over the National Insurance primary threshold (£7,228 in 2011/12).
- Employees will be able to opt out of their employer's scheme but the government is likely to make this very difficult.
Minimum contributions
- The minimum contribution will be 8% of earnings of which the employer must pay a minimum of 3%.
- For example: if the employer chooses to pay 3%, the employee will pay 4% with a further 1% paid as tax relief by Government, totalling 8%.
- The level of contributions is being phased in as follows
- from October 2012 to September 2016: total contribution of a minimum of 2% of earnings including at least 1% from the employer;
- from October 2016 to September 2017: total contribution of a minimum of 5% of earnings including at least 2% from employer; and
- from October 2017, total contribution of a minimum of 8% of earnings, including at least 3% from the employer.
- The employer contributions should be deductible for tax purposes.
What can I do to plan for auto-enrolment?
- Employers should plan ahead for an increase in costs, from the implementation of the scheme to the additional and potentially significant employment costs due to the compulsory pension payments.
- Employers should consider the implementation of salary sacrifice in conjunction with pension contributions. In this way employment costs can be reduced as a result of the national insurance savings available: at the time of writing the saving will be at least 13.8% of the employee's pension contribution (with a corresponding increase if national insurance rates were to increase in the future).
- Where significant pension costs may be anticipated going forward, the introduction of salary sacrifice sooner than later could help reduce the increased costs.