Auto Enrolment for Pensions
Automatic Enrolment for Pensions
Sherwin Currid offers dedicated accountants to support you with your employer pension obligations
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 employee’s wage will be automatically put into a pension scheme by an employer and the employer will make additional payments into the employee’s 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. This initiative aims to encourage more people to save for their future and avoid relying solely on the state pension when it becomes time for them to retire.
Which employees are eligible for auto enrolment?
The qualifying criteria for auto enrolment for employees is straightforward. The requirement cover all employees:
- Who are aged between 22 and the state pension age
- Who earn more than £10,000 per 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 joined, payments may not be refunded and may remain in the scheme until they retire. If an employee chooses to opt out, they can ask to re-join the scheme at a later date. An employer must re-enrol employees every three years, by law, even if the employee opted out originally. The government guidance can be found here.
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. If you think your employer is not complying with their pension duties, then you can report this to The Pensions Regulator using their whistleblowing service.
Employers are legally obligated to automatically enroll eligible employees into a workplace pension scheme. They must also provide relevant information about automatic enrolment to their employees including the date they’ve added you to the pension scheme, the type of pension scheme and who runs it, how much they will contribute and how much you’ll have to pay in.
Employers are required to continue making pension contributions for the first 26 weeks of maternity leave (OML) and may continue afterwards if it is in your contract. This applies even if your maternity leave is unpaid.
How much must employees and employers contribute?
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. This includes pension contributions made by the employee, employer, and the government (known as tax relief). 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 pension contributions have risen to 8% of qualifying earnings.
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.
As an employer, you are responsible for providing your employees with their employer’s workplace pension scheme.
How can Sherwin Currid help with auto enrolment?
At Sherwin Currid we have a team of pension experts who will guide you through the process of automatic enrolment. We understand that as an employer, you may have limited knowledge and experience in this area, which is why we are here to help. Our experts will work closely with you to assess your specific needs and offer guidance on selecting the correct scheme for your business.