Recent focus on pensions has been on pension ‘freedoms’. Under these anyone over the age of 55 is free to draw down their pension, but only a quarter of it will be tax-free, with any taken beyond that taxed at the marginal rate – potentially 40%.
Until pension freedom came all the talk was of low annuity rates, meaning someone paid in for years and received a tiny annual income or annuity. This prompted people to view pensions as not worthwhile – something the Government wanted to avoid, as it is unlikely anyone now in their 30s or 40s will be able to rely on the state pension.
This has taken the focus off the fact that all employers will soon have to offer every employee a pension; known as auto-enrolment, it is a legal obligation. It began with large companies in 2012, but is being extended to all employers, right down to those with one to four employees. The date when this will be compulsory is linked to your PAYE reference number. This is known as your staging date, and you can find out when this is by going to the Pension Regulator’s website and putting in your PAYE reference number. After that date employers who have not acted will be liable to a fine and daily penalty, linked to the size of their business.
The Regulator will write formally with details of your staging date, but by then you need to have a scheme in place. All employees must be enrolled, and for anyone who earns over £486 a month the employer will also have to make a contribution to the pension on a sliding scale, reaching 3% of wages in 2018. You can make a bigger contribution if you wish.
Armed with details of their employees, employers need to find a pension provider. This may be through a financial adviser, a trade body or your personal pension company and needs to be in place and discussed with employees six months before the staging date. For small businesses the amounts will be small, making it attractive to link into a bigger scheme specialising in this type of pension service.
It is not compulsory for employees to enrol, but you must offer a scheme. If they decide not to take part you need to get that confirmed in writing by the employee. It is illegal to put pressure on an employee not to enrol in a scheme, so you must have paperwork to prove it was their decision to opt out. An employee can opt out within a month of their first payment into the scheme or they can decide not to take part from the outset.
Within five months of your staging date you will have to complete a certificate of compliance. Failure to do so will lead to automatic fines. Beyond that you have to complete a review and secure a new certificate of compliance every three years.
Google auto-enrolment and there are plenty of people charging for services they make look a lot more complicated than they are, so take care. Deductions for pensions come off as part of your payroll calculation and most software programmes make allowance for this and for reporting it. Advice for employers is available free from the Pensions Regulator website, together with details of contributions.