A significant number of small businesses in the UK do not take full advantage of HMRC-approved...
A workplace pension is a pension scheme offered to employees by employers. Some workplace pensions are called ‘occupational’, ‘works’, ‘company’ or ‘work-based’ pensions.
Broadly speaking, a workplace pension works by a percentage of an employee’s pay being automatically added to a pension scheme every payday.
The Government introduced automatic enrolment for workplace pension schemes to encourage more people to save for their retirement. The rules which came into effect on 1 October 2012 mean that employers are required to offer their workers access to workplace pensions.
According to the published statistics, over 10 million individuals have been enrolled into an appropriate pension scheme since automatic enrolment was introduced.
The Pensions Regulator is the public body that protects workplace pensions in the UK. The regulator works with employers and those running pensions so that people can save safely for their retirement. It states on the Pensions Regulator website that:
"Under the Pensions Act 2008, every employer in the UK must put certain staff into a workplace pension scheme and contribute towards it. This is called 'automatic enrolment'. If you employ at least one person you are an employer and you have certain legal duties."
Employers include individuals who employ someone in a personal capacity: for example, a cleaner, personal care assistant, or nanny. This means that most businesses in the UK are now obliged to set up and administer a pension scheme for qualifying employees.
What level of contributions need to be made?
For the current tax year (2021-22) the qualifying earnings bracket is set between £6,240 and £50,270. This means that no contributions will be payable on earnings below the lower threshold of £6,240 and above the higher threshold of £50,270. These limits are set by the Department for Work & Pensions and are reviewed annually. For example, if a worker earns £25,000 their qualifying earnings would be £18,760.
Contributions for automatic enrolment
Under the automatic enrolment rules the employer and the Government also add money into the pension scheme. There are minimum contributions that must be made by employers and employees.
Both the employer and employee need to contribute. There is a minimum employer contribution of 3% and employee contribution of 4%. This means that contributions in total will be a minimum of 8%: 3% from the employer, 4% from the employee and an additional 1% tax relief.
The contributions are based on the qualifying earnings brackets highlighted above; this means that for many employees the 8% contribution rate will not be based on their full salary.
Employers are required to enrol all employees that:
- are not already in a scheme;
- are aged between 22 and the State Pension age;
- earn more than £10,000 a year; and
- work in the UK.
There are special rules for employees earning less than the minimum earning threshold and those aged under 22 who wish to join the scheme. Employers (or the pension provider) will need to be careful to ensure that proper monitoring is in place to ensure that those eligible are included within a pension scheme.
You will not have to auto-enrol into a suitable scheme if:
- you are a director of a business with no plans to employ anyone,
- you are freelance or self-employed,
- your business has a number of directors none of which has a contract of employment, or
- your business is no longer active.
However, even if you are not obliged to register under automatic enrolment, you are still an employer and you still have a duty to inform the Pensions Regulator that this is the case.
People who move jobs will retain their workplace pension and all the contributions that have been built up. If they do not continue paying into the scheme, the money will still be invested until the pension holder reaches pensionable age. It may also be possible to combine old and new pension schemes.
Employers must ensure that eligible employees are active members of a pension within six weeks of them becoming eligible for automatic enrolment. If this has not been done, any missed contributions must be backdated.
Failure to meet any requirements of the Pensions Act 2008 will be treated as a breach of the automatic enrolment regulations and failure to comply with the various, ongoing obligations will be similarly penalised. Actions taken may be restricted to warning letters, but the Regulator has powers to issue fines and penalties. Deliberate non-compliance may result in a criminal prosecution.
Employers are not allowed to try and encourage employees to opt out of a pension scheme. This is known as 'inducement'. However, an employee is allowed to opt out of a pension scheme if they so wish. They will obviously lose out on valuable contributions from their employer and the Government.
In addition, employees will usually be re-enrolled again every three years and in some cases on an immediate basis if an employee or the pension scheme meets certain criteria. If this happens and an employee still wishes to opt out, they will need to complete the opt-out process again.
Accessing pension funds
Employees will usually be unable to access their pension savings until they are 55. There are special rules for individuals that are seriously ill. Employees will also be able to have some choice over how risk-sensitive they want their investments to be. There are also Sharia-compliant and ethical funds available.
Pension scams commonly target those who have not yet reached the minimum pension age. The Pensions Advisory Service advise caution if you are offered higher rates of return by transferring your pension savings to overseas funds.
The Pensions Regulator states that:
"It is good to remember that pension scams can take many forms and usually appear to most, to be a legitimate investment opportunity. However, pension scammers are clever and know all the tricks to get you to hand over your savings. They target anyone and everyone, pressuring you into transferring your pension savings, often into a single investment."
The investments are normally overseas, where you have no consumer protection, and typically promise you a high guaranteed rate of return (typically 7 or 8% or higher). These are often false investments in luxury products, property, environmental solutions or storage and parking, which often do not exist or are extremely high risk with low returns.
There are many complex rules that employers must follow in implementing and running a pension scheme. Employers failing to comply with their auto-enrolment duties can trigger statutory notices, fixed penalties and even court action.
Enforcement action that can be taken by the Regulator if you do not meet your legal duties include:
- If you do not comply, you may face enforcement action including compliance notices, and penalty notices (fines).
- If you comply late, the Regulator will expect you to pay back any missed contributions to put staff in the position they would have been in if you had complied on time; this would include backdating contributions to the day that your staff member first met the age and earnings criteria to be put into a scheme.
- When backdating contributions, you must pay all the unpaid employer contributions and your staff member must pay theirs, unless you choose to pay it for them. Any enforcement action may require that you pay your staff member’s contributions as well as your own.
- If you do not pay your fine, the Pensions Regulator can recover the debt through the courts.