Your Pension Obligations as an Employer
Pensions are an essential resource for individuals as a reliable source of income to live on when they retire from working. A recent investigation found that the average pension pot savings across the UK are £61,897 which tends to also come with an extra £12,000 annually in retirement income. This is a significant amount to allow an individual to have a basic retirement lifestyle, but this money doesn’t appear out of thin air. As an employer, it is your duty to attend to an employee’s enrolment in a pension scheme to help facilitate this lifestyle post-retirement, which will be the focus of this piece.
What do I need to contribute?
Before we delve into what your obligations are, let’s run through the actual rates an employer and employee need to contribute to the pension pot.
The amount contributed to the pension depends on the type of workplace pension scheme the employee is enrolled in, or whether the employee has opted into a scheme or has been automatically enrolled. Make note of the auto-enrolment, as this is an important system every employer should be aware of and will be discussed in depth further on. Additionally, it is common for the government to apply a tax relief to a pension provided that the person pays income tax and pays into a personal or workplace pension.
If an employee is auto-enrolled, you as an employer must contribute at least 3% of an employee’s earnings towards the pension scheme. The employee then makes up the reminder to make the total minimum contribution of 8%. These rates only apply if the person earns between £6,240 and £50,270 a year pre-tax (also known as “qualifying earnings”) and may also be influenced by the type of private pension scheme they are enrolled in.
What is auto-enrolment?
Auto-enrolment moves away from the archaic method workplace pensions used to operate. In the old system, a burden was placed on the employee to enrol into a pension scheme but now the process is automatic provided the employee earns above £10,000 per year and is over the age of 22. This pension pot can only be accessed once the employee is 55 years old, otherwise, it is held by the company.
The reason for this change is to increase the number of people saving for retirement, which has produced positive results with 78% of UK employees enrolled in a workplace pension – up from less than 50% in 2012 when auto-enrolment came into effect.
You must also let them know when they’ve been auto-enrolled as well as:
- The date they were added to the scheme
- The type of pension scheme and who runs it
- Employer and employee contributions
- How to leave the scheme. Note that you must refund money if the employee opts out within a month
- How tax reliefs apply
You must notify them in writing of their right to join the pension scheme and of its associated details. They also have a right to rejoin a scheme at least once a year and you must auto-enrol them every 3 years if they’re still eligible and have previously opted out. It is your duty to inform an employee of these details and you cannot refuse a request to join a pension scheme. An exemption lies if, and only if, your employee earns less than the following amounts:
- £480 over 4 weeks
But you don’t always have to auto-enrol your staff if they don’t meet any of the above criteria or the following conditions:
- They have already provided notice to leave, or you have provided notice
- They have evidence of “lifetime allowance protection”
- They are already on an arranged pension with you
- They have taken a lump sum payment from a closed pension scheme, and have left and rejoined the same company within 12 months of payment received
- They opted out of an arranged pension scheme more than 12 months before the auto-enrolment start
- They are from an EU member state and in an EU cross-border pension scheme
- They are in a Limited Liability Partnership (LLP)
- They are a director without an employment contract and employ at least one person
Do I have to enrol immediately?
You are not actually required to auto-enrol your employee as soon as they are eligible. A 3-month delay period is allowed but you must inform your employee of the delay.
You can also delay the first 3 months of pension contributions, and instead pay it as a lump sum on the 22nd of the fourth month from the start of enrolment.
There are also tax saving incentives via usage of the ‘salary sacrifice’. Also known as a ‘SMART Scheme’ the salary sacrifice works by paying a portion of the salary an employee gives up directly to the pension pot. This may be desirable as it means you and your employee pay less tax and NI.
What happens if I don’t auto-enrol?
To keep things simple, you will be penalised, and in some cases heavily. The typical process involves fines being noticed, which must be paid online. In the event you are late in payment, missed contributions are expected to be paid to staff and may include the need to backdate contributions. You may also be expected to pay your staffs own contributions on top of your own. Further action involves court proceedings to recover debts which could end with a maximum of 2 years imprisonment.
Fines tend to range between £400 for non-compliance with notices to as much as £10,000 daily depending on the size of your company and staff numbers.
If you have further questions regarding your obligations as an employer towards pensions feel free to give us a call and have a chat. Find our contact details here.