Current Issues | Tax | 27th March 2014
What is Auto Enrolment?
Brought in by the Government, a workplace pension is a way of saving for retirement arranged by an individual’s employer. It is sometimes called a ‘company pension’, an ‘occupational pension’ or a ‘works pension’. Over the next few years all businesses will have to provide a workplace pension for their staff – there is no choice. All businesses need to act now and ensure they understand their obligations and have the correct processes and systems in place to deal with the set-up phase and the ongoing administrative burden.
Up to 11 million workers will be automatically enrolled into a workplace pension. Large employers have gone first, with small and medium-sized employers following over the next six years. For most employers with 49 employees or fewer Auto Enrolment will start from 1 June 2015.
The rationale behind Auto Enrolment is that millions of people are not saving enough to have the income they are likely to want in retirement. Life expectancy in the UK is increasing yet at the same time people are saving less into pensions.
- In 1901 there were ten people working for every pensioner in the UK.
- In 2010 there were three people working for every pensioner.
- By 2050 it is expected that there will be just two workers for every pensioner.
Who will be enrolled into a workplace pension?
Employers will automatically enrol workers into a workplace pension who:
- are not already in a qualifying pension scheme
- are aged 22 or over
- are under State Pension age
- earn more than £9,440 a year (this figure is reviewed every year), and work or usually work in the UK.
Other employees can ask to be enrolled (see the table below) and all employees have the right to opt out or cease pension scheme membership.
How does Auto Enrolment affect my business?
When do employers have to start enrolling their workers?
It is highly unlikely that your business will not be affected by Auto Enrolment. The date workers are enrolled depends on the size of the company they work for. It is being rolled out over the next six years (this is called a staging date).
- Large employers (with 250 or more workers), started automatically enrolling their workers between October 2012 and February 2014 (some employers may choose to start earlier).
- Medium employers (50 to 249 workers) will have to start automatically enrolling their workers between April 2014 and April 2015.
- Small employers (49 workers or less) will have to start automatically enrolling their workers between June 2015 and April 2017.
- New employers (established after April 2012) will have to start automatically enrolling their workers between May 2017 and February 2018.
- Employers who have chosen to use Defined Benefit or Hybrid Schemes can delay their staging date until 30 September 2017.
Contact your payroll provider to confirm your staging date. If Shipleys manages your payroll or you need assistance please call our payroll department, which will help you confirm your staging date.
How much will pension contributions cost workers and employers?
Most people will be automatically enrolled into a Defined Contribution scheme or money purchase scheme. This means that all the contributions paid into your pension are invested until you retire. The amount of money you have when you retire depends on how much has been paid in and how well investments have performed. In most schemes, when you retire you can take some of your pension as a tax-free lump sum and take the rest as a regular income.
The Government has set a minimum amount of money that has to be put into a Defined Contribution scheme by employers and workers. This is a percentage of the employee’s gross pay as defined by the scheme. This percentage starts low and increases gradually over a number of years (this is sometimes called phasing).
What is the process for my business?
- It is recommended that 12 to 18 months prior to starting Auto Enrolment employers start communications with their employees to explain the changes and the process. Most businesses will need to act now.
- It is important to ensure the system adopted to manage the process is in place, tested and understood in order to guarantee compliance at the business’ staging date, as large fines for non-compliance are being imposed.
Employers – what will we need to do?
Main problems so far
Based on feedback from larger employers the main problem areas seem to be as follows.
- Software providers seem to have had implementation problems with their payroll systems. We are assured that these will be resolved.
- Overall responsibility for compliance, whether this lies with HR, payroll and/or the pension provider.
- Part-timers with irregular earning patterns.
- Selection of a suitable qualifying scheme.
Fiona will be automatically enrolled into a workplace pension by her employer Fiona is aged 27 and earns £37,000 a year working for a recruitment consultancy company. She is not already a member of her employer’s workplace pension. As Fiona earns more than £9,440 a year and is over 22, this means her employer has to automatically enrol her into the pension and pay into it. She will also get a contribution from the Government in the form of tax relief.
Leon will not be automatically enrolled into a workplace pension by his employer Leon is aged 20, earns £17,000 a year working for a building contractor and is not already a member of his employer’s workplace pension. As Leon is under 22, his employer does not have to automatically enrol him into the workplace pension. However, Leon can ask to join the pension. If he does, his employer has to enrol him and pay into it. He would also get a contribution from the Government in the form of tax relief.
Julie is already a member of her employer’s workplace pension Julie is age 59 and earns £45,000 a year working for a publishing house. Julie is a member of her employer’s pension scheme. Her employer pays into it, the Government pays into it through tax relief and the pension meets the Government’s new standards. As she is already in the workplace pension, Julie will not be automatically enrolled.
Peter will not be automatically enrolled into a workplace pension by his employer Peter is aged 42 and earns £4,500 a year working as a cleaner for a small charity. He is not a member of the charity’s pension. Because Peter earns less than £9,440 a year, his employer does not have to automatically enrol him. However, Peter can ask his employer to put him into a pension and his employer has to do it. As Peter earns less than £5,668 a year, his employer does not have to pay into it, but can choose to do so. He might also get a contribution from the Government in the form of tax relief – he would need to check with whoever runs the pension scheme.
Lily enrols back into workplace pension saving. Lily is 26, works full-time, earns £28,000 a year and has just moved into a new flat. Lily meets the eligibility criteria and her employer will automatically enrol her into a qualifying pension scheme. If pension saving is not right financially for Lily at this time, she can opt out of workplace pension saving. She will receive a refund on any contributions she has made if she opts out in the first month of being automatically enrolled by her employer. If she does opt out, Lily’s employer has to automatically enrol her again (if she still meets the eligibility criteria) approximately every three years from the original enrolment date. This gives Lily the opportunity to re-assess her finances and pension saving opportunities once her financial obligations have become more settled. She can choose to stay in the workplace pension or opt out again.
If you would like advice or further information, please speak to your usual Shipleys contact or our payroll department: firstname.lastname@example.org
Specific advice should be obtained before taking action, or refraining from taking action,on any of the subjects covered above.