The year 2012 saw the biggest reform to the pension market in the UK for a great many years, and it affects every single employer – even if you’re a multi-national bank or a small, local dental practice, for instance. The last eight months have seen millions of workers in the UK automatically enrolled into a workplace pension, with those at large firms getting theirs first, followed by SME employers over the course of the next six years.
A workplace pension – sometimes known as a company pension or a works pension – is a way of saving money for retirement that is arranged by your employer. Under the new scheme, you won’t be the only person that pays into the pension – your employer (and government tax relief) will pay into it too.
However, those who already save in a workplace pension or are self-employed will not be able to sign up.
Ministers believe it is integral that people make a start to their retirement fund at an early stage in their working lives. These savings will then be used to top up their state pension, affording people a better quality of life in their senior years.
However, millions of people simply aren’t saving enough to have the income they are likely to want in retirement. Figures from the Department of Work and Pensions suggest that in 1901, there were ten people working for every pensioner in the UK. Just three years ago, there were three people working for every pensioner, while in 2050, it is expected that this will change to just two workers.
As these new pensions are required by law, employers will have to start making contributions to all of their employees (if they meet specific regulations). This includes employees aged between 16 and 74, those working in the UK and those for whom you deduct income tax and NI contributions from their wages.
Let’s create a fake employee – a new recruit that joins a dental practice after seeing a dental recruitment advert online – to see what the minimum employer contribution will be. The employee satisfies all the current criteria for a workplace pension, and their basic wage is £20,000 pa with no commission, bonus or overtime. The minimum employer contribution is three per cent, while the staff member’s minimum contribution, including tax relief, is five per cent.
The employer’s contribution of three per cent comes to £429.96 per year, while the staff member’s contribution of five per cent, including tax relief, totals £716.60. Overall, the total minimum contribution will be £1,146.56 per year.
“But three per cent of 20,000 isn’t 429.96?”
That’s correct. Under the scheme, the minimum amount that must be paid into the pot is eight per cent of the member of staff’s gross earnings, but only on earnings between £5,668 and £41,450 per year. As a result, we are only working out three per cent of £14,332.
Let’s discuss another employee, a trainee who only earns £4,000 part-time. As this employee earns less than £9,440 a year, an employer does not have to automatically enrol him or her. However, the employee can ask for a workplace pension, and the employer will have to provide one. Furthermore, as this employee earns less than £5,668 a year, his or her employer does not have to pay into it, though the employee may choose to do so.
However, it is worth keeping in mind that there will be other costs involved alongside contributions. Make sure you budget for implementation costs and the pension scheme’s annual management fees and administrative charges.
That all depends on the size of your practice. Large employers (classed as those with 250 workers or more) can start automatically enrolling their workers immediately, though the deadline is February 2014.
Medium-sized employers (50-249 workers) will have to start enrolling their workers between April 2014 and April 2015, while small employers (49 workers or fewer) have between June 2015 and April 2017 to automatically enrol their staff.
Employers who have only just established their business (after April 2012) will have to start enrolling their employees from May 2017 to February 2018.
On the employee side, it’s a positive move by the government to help people start saving for their retirement. There’s always the option of opting out of the auto-enrolled workplace pension.
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