The recent changes to pensions are set to have biggest impact on the way we save for our retirement in the last 25 years. To date, they are also the government’s most concerted drive to encourage savings for our old age. So if you run a small business, what are the changes, and how will they affect you?
The UK government is facing a crisis. The combination of a workforce that’s set to live longer than ever, and fewer employed contributors paying National Insurance, makes the government increasingly impotent to meet demand for a state-dependent pension scheme.
The government hopes to combat the problem with the introduction of Auto Enrolment. For small business, it is no doubt a familiar term – but what does it involve?
What is Auto Enrolment?
Auto Enrolment is a legal obligation on employers to enroll eligible staff into a UK registered, workplace pension scheme (unless they are already part of a Qualifying Scheme).
Numerous auto enrolment providers are available in the UK with Nest, People’s Pension and Now Pensions being three of the most recognisable. But a variety of providers are on offer and many have specific capacity for small companies and start-ups.
“Auto Enrolment came into force in 2012, but it has been mainly for the larger companies – it is only now that smaller companies are reaching their staging date,” says Le Bureau member James Dare, an associate partner practice of St James’s Place Wealth Management.
Companies with less than 50 workers will be required to comply some time between 2015 and 2017, whilst those established after 2012 must comply by 2017/18.
Who is eligible?
Anyone aged between 22 and state pension age of 65, with earnings of £10,000 annually, must be auto enrolled. This applies to all businesses, even those that employ just one worker. As with any governance of this nature, James explains that there are caveats as to who is eligible – please contact James or go to The Pensions Regulator for more information.
When does it begin?
You must begin by establishing your staging date – this is when the obligation begins. You need to inform your workforce a minimum of six weeks before this date that they will be auto enrolled.
At this point, “You’ll have to work with your payroll,” says James. “That’s crucial, as they will be communicating with the pension scheme.”
Informing your staff
Employers are required to write a formal letter to all eligible staff six weeks before the scheme starts, informing them that they have been enrolled and what this means for them. This should happen as soon as a worker becomes eligible (either due to a salary increase, or in age) and whenever a new worker joins the business.
An employee may only opt out of the scheme after they have been enrolled and become an active member. James explains that this may happen in the first month, at which point a worker can get their month’s worth of contributions back. “After that, you can opt out whenever you want, but you wouldn’t get your money back. It will be locked in the pension, which you can’t take until you’re 55.”
The government is resting much of its hope for Auto Enrolment on the premise that most workers will simply not get around to opting out.
As an employer, it is vital you do not incentivise your employees to leave the scheme. The penalty for doing so is severe.
Advising your staff
There is no jeopardy in giving your staff information about your pension scheme or explaining why it is beneficial to join. However, you are prohibited from encouraging them to leave the scheme, or to benefit financially from it yourself. Most employers elect to tell their staff that independent financial advice is available. You may also invite an adviser to consult with staff.
How to prepare
Even employers who already offer a pension scheme must prepare for Auto Enrolment. With the new tax year now upon us, here are the key areas to consider:
– Establish staging dates
– Determine which of your workers are eligible
– Choose a Qualifying Scheme
– If necessary, decide whether an existing Qualifying Scheme must be adapted for individual workers
– How much you will pay in – will you exceed the minimum requirement? If so, by what amount?
– Establish the payroll facility
– Determine how you (and the scheme) will inform your staff
– Explore the impact that cost of contributions and administration will have on business profits in the current and long term
Please note that this article in no way constitutes financial advice. For direct advice, please contact a certified financial advisor such as James DareBack to Blog