The retirement and pensions industry is a constantly evolving topic within finance and one that can affect us all, employer or employee.  Whether it is the different types of pensions available to you, how you take your income when you retire, whether you are an individual with a personal pension and/or an employee with a work based personal pension or perhaps an employer yourself managing an auto enrolment pension scheme, keeping on top of the evolution is a huge challenge.

In fact Auto Enrolment, which kick-started in October 2012, could perhaps be classed more as revolutionary rather than evolutionary and is a real challenge in itself. Auto Enrolment is the requirement that employers provide eligible employees with a workplace pension scheme and encourage them to build up an income for their retirement.  Starting with the largest companies, each company has a specific ‘staging date’ that is the time by which they must have their pension scheme up and running.

Auto Enrolment evolved from the realisation by the Government that most people were not saving enough for their retirement and would not be able to rely on the State Pension to provide adequately for them when they do retire.  Below I outline some of the key requirements for both employees and businesses with these new pension reforms.

What You Need to Know as an Employee

Auto Enrolment for employees is seen as a positive step in helping them save for their retirement, but what do you need to know about enrolling into your employer’s scheme?

  • The new law means that every employer must automatically enrol workers into a workplace pension scheme if they;
    • are aged between 22 and State Pension age (the age you receive your State Pension depends on your date of birth and gender)
    • earn more than £10,000 a year
    • work in the UK
  • A percentage of your pay is put into your pension automatically every time you are paid.
  • Your employer also contributes to your pension and you also receivetax relief from the government.
  • When you take your pension pot depends on the rules of the pension scheme, but it is usually around age
  • How much you will get and how you can take it will depend on thetype of scheme your employer provides.
  • Most schemes allow you to take 25% of your pension pottax free.
  • If your pension pot is quite small, you may be able to take it all as a lump sum– again, 25% would be tax free but you’d pay Income Tax at your prevailing marginal tax rate (for the 2015/16 tax year, 20%, 40% or 45%) on the remainder.
  • You can decide to opt out of the scheme by contacting your pension provider and your employer must tell you how to do this.
  • If you opt out within a month being enrolled into the scheme, you will get back any money you’ve already paid in.
  • You may not be able to get your payments refunded if you opt out later – they will usually stay in your pension pot until you retire.

The Outlook for Business

What you need to know as an employer:

  • Your staging date and what you are required to do by that date:
    • 250+ employees – October 2012 to February 2014
    • 50-249 employees – April 2014 – April 2015
    • 30-49 employees – August 2015 – October 2015
    • Less than 30 employees – January 2016 – April 2017
  • Your staging date is assigned to your PAYE number, but if you have more than one PAYE scheme then your staging date is usually based on the scheme with the most workers. The Pensions Regulator (TPR) will write to you at least 12 months before your staging date.
  • You must provide your workers with access to a workplace pension scheme that meets certain minimum standards by your staging date.
  • If you want to start putting in place your duties ahead of your staging date, you can bring your date forward. TPR provides a list of available staging dates which you can find on their website.  You will also need your scheme provider to agree to this before you do it and inform TPR a month in advance.
  • You can also use a waiting period to push your staging date back by up to three months, but you will still need to have your scheme in place and offer your workers the right to opt in to the scheme on your staging date. This is also known as postponement. Your workers can still ask to be enrolled in the scheme during the waiting period, but you won’t have to automatically enrol them until the waiting period ends.
  • Setting up your pension scheme and enrolling your staff into the scheme will take time. Ideally, you should allow at least 12 months preparing for this. Automatic enrolment is your legal duty and if you don’t act you could be fined up to £10,000 per day depending on the size of your company.
  • Automatically enrol eligible workers, while others can ask to join.
  • Pay contributions into their retirement pots, depending on how old they are and how much they earn.
  • Contributions to the scheme come from three places – you will make deductions from your employees pay; you will make employer contributions and; the government will contribute via tax relief.
  • You will need to make a minimum level of contributions for all jobholders. This is currently 2 per cent of their qualifying earnings. From this, you will pay at least 1 per cent, but you can contribute more if you want to.
  • TPR provide a step by step guide to help you through the process.
  • Help employees understand how to opt out – but inducing opt out is illegal.

 How can we help?

Whether you are an employee or an employer we can help you understand the complexities of retirement, pensions and auto enrolment for your individual circumstances.  We will look at your existing schemes and help you to understand what your options are and how best to manage them.

The purpose of this article is to provide technical and generic guidance and should not be interpreted as a personal recommendation or advice.  It represents our interpretation of current and proposed legislation and HMRC practice as at the date of the publication.  These may change in future. Auto enrolment advice to employers is not regulated by the Financial Conduct Authority.

Angus Kirk

Financial Planner at Bridge Investments
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