Millions of Britons are not saving anything for their retirement – but pensions auto-enrolment is in the process of changing all that.
If none of your clients have had to auto-enrol their staff into a workplace pension yet the chances are they will need to very soon. Around 1.8 million employers, right down to organisations with a single employee, are legally required to enroll their staff into a workplace pension between now and 2018.
1. Which employers have to automatically enroll their staff?
Any organisation or individual employing anyone between age 22 and state pension age and paying them £833 a month or more has to enroll them into a workplace pension – even nannies, members of small family businesses and personal care assistants are included. Workers who fit these criteria are known as ‘eligible employees’.
2. What about staff who don’t meet these age and earnings thresholds?
Employees aged 16 to 21 or those over state pension age but under age 75 have the right to opt into the employer’s workplace scheme if their earnings take them over the £833 figure, although they do not have to be automatically enrolled. These employees, known as ‘non-eligible jobholders’ also benefit from employer contributions if they opt in. Employees in these age groups who earn less than £833, known as ‘entitled workers’, can opt into their workplace scheme but the employer does not have to pay contributions.
3. How much do employers have to pay in?
Contributions are being phased in gradually to discourage employees from opting out. Employer contributions are a minimum of 1 per cent of earnings between £5,824 and £42,385 a year until October 2017 when they rise to 2 per cent, rising again to 3 per cent from October 2018.
4. And how much are employees’ contributions?
They pay 1 per cent of gross earnings in the £5,824 and £42,385 band, rising to 3 per cent in October 2017 and 5 per cent in October 2018. That gives a total combined contribution of 8 per cent of band earnings once the new regime is fully embedded.
5. When do employers have to start automatically enrolling staff?
Every employer is being given a ‘staging date’ by The Pensions Regulator, which is the date by which they must have their scheme up and running. These are based on number of employees within the organisation and the employer’s PAYE reference number. You can find out an employer’s staging date at www.tpr.gov.uk/staging-date. Employers that do not pay staff through a PAYE scheme are being given a staging date of 1 April 2017.
6. What happens if an employer doesn’t get their act together in time?
The Pension Regulator can issue fines ranging from £50 to £10,000 a day for persistent and willful non-compliance with rules, although minor breaches are unlikely to incur penalties.
7. What sort of pension scheme do employees have to be enrolled into?
Employers have to choose a workplace pension scheme that meets certain quality requirements, which are detailed on The Pensions Regulator’s website. Schemes must have a maximum annual management charge equivalent to 0.75 per cent a year of the value of the investor’s fund, and must meet certain investment strategy and governance standards.
8. What about situations where an employer already offers a pension to some staff but not all?
Some employers offer a generous scheme to certain tiers of staff that is not available to all employees. They can enroll eligible staff into that scheme if they wish, provided it meets auto-enrolment standards, although they are free to offer newly enrolled staff a more basic, cheaper scheme if they wish.
9. What communication obligations does the employer have?
Employers must write to staff after their staging date has passed explaining what is happening. The Pensions Regulator’s website has template letters, although some payroll or provider software systems can also do this.
10. What happens if employees opt out? Employees are free to choose to leave a scheme, but employers will face regulatory action if they are caught attempting to encourage or coerce them to do so. If they do opt out, employers have to re-enrol them back in three years after the organisation’s original staging date, although they can opt out again after that if they really want to.
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John Greenwood is the author of The Financial Times Guide to Pensions and Wealth in in Retirement.