Pensions auto-enrolment: are you up-to-date?

With effect from 1 June 2015, small businesses employing fewer than 30 staff became bound by the requirements of the new pensions auto-enrolment regime, obliging them to automatically enrol all eligible employees into a qualifying pension scheme and to make a minimum contribution to that scheme.

The Pensions Regulator recently warned that even those who employ a single care worker, such as a carer or nanny, must comply with the auto-enrolment regulations, with very few exceptions.

Under auto-enrolment, employees over the age of 22 and earning more than £10,000 per annum now have the right to belong to a workplace pension scheme, unless they choose to opt out.

6 April 2015 saw an increase in some of the thresholds and limits for auto-enrolment. While the earnings trigger remains at £10,000 for 2015/16, the lower limit of the qualifying earnings band has risen to £5,824 and the upper limit of the qualifying earnings band is now £42,385.

Over five million workers in larger companies are already in the scheme, and an estimated 3.8 million workers are expected to be enrolled by smaller employers between now and 2018.

According to recent research, one in four small businesses is as yet unprepared for auto-enrolment. Business owners are being urged to ensure that they are prepared for the new regulations. Employers who fail to comply could be liable to enforcement action and/or a penalty.

We have produced a handy checklist to help employers with the auto-enrolment process.

Employer checklist

Nominate a point of contact

The Pensions Regulator will be writing to you with important updates as you prepare for automatic enrolment. It is therefore advisable to nominate a main contact within your firm who will take responsibility for managing all such correspondence.

Know your staging date and develop a plan

Your staging date is determined by the total number of people in your largest PAYE scheme, based on HMRC’s records as at 1 April 2012. You can find out your staging date by visiting www.thepensionsregulator.gov.uk/staging.

Assess your workforce

Under auto-enrolment, you will need to identify any eligible jobholders working for you. You will also need to consider whether you have an employer duty in relation to other types of workers including non-eligible jobholders and entitled workers.

Review your pension arrangements

Decide on the type of pension scheme you will offer. Do you have an existing scheme that meets (or can be changed to meet) the Government’s requirements, or will you need to set up a new one? You may also want to consider whether the new NEST scheme would suit your needs.

Communicate the changes

Employers are required by law to write to all workers (except those aged under 16, or 75 and over) explaining what automatic enrolment into a workplace pension means for them. It is worth noting that the communication requirements for the different categories of worker were recently simplified in a bid to ease the burden on employers.

Make sure you have a strategy in place for briefing employees and plan how you will manage any queries that arise. A range of letter templates are available on the Pensions Regulator website to help employers fulfil their legal obligations.

Automatically enrol eligible jobholders

Under the new regulations, employers are required to: provide information to the pension scheme about the eligible jobholder; give enrolment information to the eligible jobholder; and make arrangements to achieve active membership for the eligible jobholder. This should be carried out within the ‘joining window’ (the six week period from the eligible jobholder’s automatic enrolment date).

Register with the Pensions Regulator and keep records

All employers will need to register with the Pensions Regulator within five months of their staging date. Registration can be completed online. Employers must also keep specific records about their workers and their pension scheme(s).

Contribute to your workers’ pensions

From October 2018 all businesses will need to contribute at least 3% on the qualifying pensionable earnings for eligible jobholders. Employers are also required to make contributions for non-eligible jobholders who choose to opt in to the pension scheme.

And don’t forget to…

Budget for the cost increase

The changes will undoubtedly have financial implications for employers. Make sure you factor in the additional costs of contribution and administration into your budgets.

Review your systems

How will you adapt your existing administration and payroll systems to accommodate the changes? What are the time and cost implications?

Keep track of age and earnings

It is important for employers to keep track of their employees’ ages and earnings as some members of staff may move between the different categories of worker. This is especially important for workers who earn below the qualifying earnings threshold, or who are under 22 years of age.

For more information on pension auto-enrolment visit the Pension Regulator’s website at: www.thepensionsregulator.gov.uk. From reviewing your payroll needs to cash flow forecasting and budgeting, we can advise on a wide range of business and personal planning issues. Please contact us for further details.

Chancellor announces new tax regime for inherited pensions

In his speech at the Conservative Party Conference last month George Osborne, the Chancellor of the Exchequer, noted that, even following his reform of the tax regime for pensions announced in this year’s Budget, ‘there are still rules that say you can’t pass on to the next generation any of your pension pot when you die, without paying a punitive 55% of it in tax.’  He went on to say that: ‘I could choose to cut this tax rate. Instead, I choose to abolish it altogether. People who have worked and saved all their lives will be able to pass on their hard-earned pensions to their families tax free. 

Effective from 29 September 2014. The children and grandchildren and others who benefit will get the same tax treatment on this income as on any other, but only when they choose to draw it down. Freedom for people’s pensions. A pension tax abolished. Passing on your pension tax free.’

Briefing notes were published by HM Treasury the same day. These stated that the new regime will apply ‘from April 2015.’ Possibly this can be reconciled with the Chancellor’s announcement by assuming that the new arrangements will apply where the individual dies on or after 29 September 2014 and the payment is made on or after 6 April 2015.

The Treasury notes indicate that, ‘from next year’, anyone in a drawdown arrangement or with uncrystallised pension funds will be able to nominate a beneficiary to inherit his pension savings.

If he then dies before attaining age 75, the beneficiary ‘will pay no tax on the money they withdraw from that pension, whether it is taken as a single lump sum, or accessed through drawdown.’

However, if he dies after attaining age 75, drawdown payments will be taxed as the beneficiary’s income. Lump sum payments will be taxed at 45% in 2015/16, but thereafter at the beneficiary’s marginal rate. This delay is to allow time for details of a tax deduction scheme to be worked out with pension providers.

Neither the Chancellor’s statement nor the Treasury briefing notes mention the Inheritance Tax position.

Pension Planning Update

On Budget Day, the Chancellor announced that, from April 2015, ‘pensioners will have complete freedom to draw down as much or as little of their pension pot as they want, any-time they want. No caps. No draw-down limits. No one will have to buy an annuity.’ 

So far, so good, but in some cases pension savers will need to take care to protect their new-found right not to buy an annuity. For example, some pension plans provide that, if the plan holder does not give alternative instructions by a fixed date (usually the default retirement date specified in the pension plan documentation), his or her savings will automatically be used to buy an annuity. Cases have been reported of companies ignoring telephone conversations with plan holders and then, citing the lack of written instructions, using their money to buy unwanted annuities. There is a 30-day ‘cooling off’ period, but after that it can be difficult or impossible to unscramble the situation, so we would recommend all pension savers to check what their plans actually say.

Another point is that although pensioners will by statute be given ‘complete freedom to draw down as much or as little of their pension pot as they want, any-time they want’, individual pension plan providers will not be required to provide this facility (on the grounds that they may find it expensive and burdensome to set up the necessary systems to do so). So if your existing pension plan provider is unwilling to offer ‘flexible draw-down’, you will have to transfer your funds to one that will. No doubt a charge will be levied. And it appears that the transfer will have to be made before you reach the normal retirement age set by your existing scheme.

Final details of the new regime will not be available for another few months, but once they are, most people should probably be reviewing their pension planning arrangements.

Increasing your National Insurance Retirement Pension

It is possible to defer your State Pension, and in return receive a higher pension later. At present, the rule is that for every five weeks you defer your pension, it will increase by one per cent. After one year, the pension will have increased by ten per cent, and after five years, by just over 50 per cent.

The State Pension is index-linked, so if you defer now, in 2019 you will receive 152% of whatever the pension is for that year (including any entitlement you have under the State Second Pension, SERPS or Graduated Pension schemes), and so on in future years.

Especially considering the promise of index-linking, there is an argument for deferring if you can afford to do so, even if this means dipping into capital to pay living expenses in the meantime.

Last month some newspapers reported that the rate of increase is to be halved, with effect from April 2016. However, this was itself only half true. In fact, the rate of accrual is to be reduced from one per cent every five weeks, to one per cent every nine weeks, but only for those who reach State Pension age on or after 6 April 2016 - this means men born on or after 6 April 1951 and women born on or after 6 April 1953. Anyone born before those dates will continue to qualify for the ‘one per cent every five weeks’ rate of accrual, even after April 2016.

Auto Enrolment

Make sure you're ready and know when your staging date is! See below for a slideshow provided by the Pensions Regulator...

Pensions: Auto Enrolment

You may well have heard about Auto Enrolment, it is on its way so I thought some basic information would be useful....

Auto Enrolment is a government scheme to encourage people to save for their retirement by automatically including them in a pension scheme unless they opt out.

There are useful resources available detailing who it will affect and how it all works from the Pensions Advisory Service and The Pensions Regulator.

For employers the main point for now is when does it start.  This is known as the staging date and varies depending on the number of employees on your payroll.  The largest businesses have already started as their staging date was 1st October 2012.  For the majority of employers with fewer than 50 employees the earliest Auto Enrolment would start is 1st June 2015 see this table for details.

Even then the contributions employers make will be small so will have little impact on your payroll costs but it is another piece of red tape for employers so worth being aware of even if it is a little way off.