What is Auto Enrolment for workplace pensions?
Automatic enrolment or 'auto enrolment' was introduced under the Pensions Act 2008 and covers the requirement that every employer in the UK has to put certain staff into a workplace pension scheme and make contributions towards it.
The law means that a small percentage of an employees wage will be automatically put into a pension scheme by an employer and the employer will make additional payments into the employees’ pension on top of that.
The pension funds that are built up for the employee though auto enrolment can then be used to pay the employee extra income on top of their state pension when they reach pension age.
Which employees are eligible for auto enrolment?
The qualifying criteria for auto enrolment for employees is straightforward. The requirements cover all employees:
Who are aged between 22 and the state pension age
Who earn more than £10k a year
Who work in the UK
Employees are automatically enrolled in a pension scheme but they do have the right to opt out of auto enrolment. If an employee opts out within 1 month from the day that they officially became a member of the scheme, then they are treated as if they were never a member of the pension scheme and any payments that they have made towards their pension will be refunded.
However if they opt out after this date, then depending on the scheme, payments may not be refunded and may remain in the scheme until they retire. We can help you maange this with our pension service and we can calculate the contributions if we help you with Payroll and PAYE.
Auto Enrolment employee safeguards
Rules have been put in place with auto enrolment to protect and safeguard the employee. For example, employers are not allowed to offer incentives to employees to opt out of their workplace pension or to imply during recruitment that they will only be employed if they opt out of the pension scheme. In addition, employers are prevented from unfairly dismissing employees that stay in their workplace pension scheme.
How much must employees and employers contribute to a workplace pension?
The amounts that are required to pay into the pension schemes are dependent partly on the type of scheme.
Defined contribution schemes
Most people that are automatically enrolled into a pension scheme will be enrolled into a defined contribution scheme. This means that all the contributions that you and your employer pay into your pension scheme are invested until you retire. Therefore the amount of money that you have for your pension at retirement will depend on the investment performance of your contributions. Most schemes allow you to take a tax free lump sum when you retire and then the remainder you take as regular income.
If you are in a defined contribution scheme the government has set a minimum percentage contribution of money that needs to be put into the scheme by both employers and employees. The minimum percentage contribution has to be made on anything the worker earns over £5,772 up to a maximum limit of £41,865 (these figures do change).
Currently the total minimum contribution into a defined contribution scheme is 8%. This total contribution comprises of the workers contribution, the employers contribution and the tax relief added together.
The minimum contribution is exactly that and both employers and employees can contribute more if they wish.
Defined benefits schemes
Some employees may be automatically enrolled in a defined benefit or hybrid pension scheme. The schemes are also known as ‘final salary’ or ‘career average’ schemes. These schemes determine the amount of money that you receive on retirement based on a number of things which typically include the number of years that you have been a member of the scheme and your earnings. Similar to defined contribution schemes you can often take a tax free lump sum on retirement and the rest as a regular income.
There are separate arrangements covering contributions into defined benefits schemes as employees cannot vary the amount that they contribute.
What is NEST?
Employers are able to choose their pension provider however pensions is a complex area and choosing a suitable provider can be difficult. Therefore when Auto Enrolment was introduced, NEST was set up. NEST is a trust based defined contribution pension scheme which seeks to ensure that all UK employers have access to a suitable pension scheme that meets their employer obligations. NEST is a not for profit scheme and the Trustee has a duty to act in the members best interests. It has been designed to offer a straightforward and low cost way in which employees can save for retirement.
How do I choose a pension scheme?
Choosing a pension scheme is a big decision and careful consideration should be made. You should also be aware that the setting up of a pension scheme can be a slow process and you should ensure that you give yourself enough time to set the scheme up before you need it.
You will need to ensure that the scheme that you choose is set up for Automatic Enrolment.
If you need help in selecting a suitable scheme then it is advisable to get help from your accountant or financial adviser.