Millions of workers have been signed up to pension schemes by their employers under the government’s automatic enrolment scheme and now it is the turn of small businesses.
Auto-enrolment was introduced in 2012 to get more people saving for their retirement.
The idea is that employees are encouraged to save by automatically being signed up to a company pension scheme.
Since 2012, larger employers have been responsible for setting up and enrolling workers onto schemes but since the start of this year smaller businesses, those with 50 or fewer staff, have had to comply.
The government has even created a colourful character called Workie to raise awareness of auto-enrolment.
Employers will face increased setup and payroll costs from this as they need to contribute to the schemes and may need to pay set up costs.
The government is trying to tackle the savings gap by getting people to start saving into a pension as early as possible.
Individuals are automatically opted in by their employer. They are able to opt-out after one month but the idea is that inertia will kick in so those who may not have previously saved will build up some retirement savings.
This will take some of the pressure off the government with less people facing financial difficulties in retirement.
All companies have allocated dates when they need to have set up a scheme by. These are known as staging dates.
The Pensions Regulator should write to a company to inform them of their responsibilities and when they need to start taking action. You can find out your staging date by entering your details on the Pensions Regulator’s website.
Anyone working for a company aged between 22 years and the state pension age who earns more than £10,000 a year must be auto-enrolled.
If someone earns between £5,824 and up to £10,000 then they can opt-in themselves and the employer has to contribute into the schemes.
Anyone earning less than that can choose to be enrolled, but the employer doesn’t have to contribute.
Staff have to be enrolled within the first six weeks of joining a company, but the Pensions Regulator will also let you stretch this to three months.
An employee can leave a scheme after one month.
Once a staff member is enrolled they have to be automatically re-enrolled every three years. This provides an opportunity to get staff who previously left a scheme back in.
There are two main types of workplace pension, defined benefit and defined contribution.
A defined benefit scheme promises employees a payout when they retire based on their salary and years of service. These are quite rare nowadays as they are expensive to run.
In contrast, both employees and employers have to put money into a defined contribution scheme
An employer can either outsource the responsibilities to a pension fund or insurance company, known as a contract-based scheme. They would manage setting up individual accounts, provide annual updates and take contributions.
This can be expensive as there are likely to be set up fees and you may need to pay for financial advice.
Other companies manage all this themselves using a trust based schemes. But this can be time consuming as you need to keep track of who is part of the scheme and how much is being contributed as well as where the money should be invested.
There is a middle-ground that has been set up specifically for auto-enrolment in the form of master trust products.
These are pension providers that manage a centralised workplace pension fund for several companies at the same time. Small businesses can sign up to a master trust and all the administration is managed by the pension rather than the company.
These tend to be cheaper but check what your master trust offers as all have different services. Some will provide help setting up schemes while others will just provide the underlying pension fund.
There is a specific government-backed master trust scheme called Nest and private providers such as Smart Pension.
Some will have set up fees while others will just take a fee from a percentage of the member’s pension pot.
Employers will need to pay for any financial advice they require in choosing a scheme and any set up costs. These will differ across providers.
Once the scheme is set up, employers currently must contribute a minimum amount equal to 1 per cent of their employee’s salary every time the employee is paid.
The minimum employee contribution percentage is currently 1 per cent but this amount can be paid by the employer.
This amount is set to increase from 2018 to 2 per cent for employers and 3 per cent for staff.
Most companies will be affected by auto-enrolment, unless you are a micro-business where there are only directors involved.
If you don’t have any staff other than directors then you are exempt as long as no-one has an employment contract.
There is an exemption if just one director has an employment contract but you will need to set up a scheme if more than one director has a contract.
The Pensions Regulator may still write to you about automatic enrolment so you will need to register your exemption with the Pensions Regulator.
Auto-enrolment is directed at employees so if you are a sole trader or limited company director you wouldn’t qualify.
You can still set up your own personal pension or self-invested personal pension.
Our commercial managers will be able to talk you through the steps that need to be taken to setup a pension scheme and manage your payroll.