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Since 2018, it’s an employer’s job to make sure that any eligible members of staff are automatically enrolled into a workplace pension. If you’ve recently taken on a new employee and now need to set up a workplace pension scheme – this one’s for you!

What is a workplace pension?

Not to be confused with the state pension, workplace pensions are arranged by employers. Whilst most people will qualify for some sort of State Pension once they reach State Pension age, it’s no secret that the UK has one of the lowest state pension rates in Europe. To try and solve this, the government introduced workplace pensions.

Eligible staff are auto enrolled to the pension scheme, though they can opt out if they want to. Once signed up, their employer will deduct contributions from an employee’s wages, and pay them into the scheme on their behalf along with their own employer contribution.

 

Workplace pension rules in a nutshell

You must automatically enrol an employee into a workplace pension if they meet all these criteria:

It’s not just full-time workers we’re talking about here either. Part-time employees, those on short-term contracts, as well as anyone on parental, maternity, adoption, or carer’s leave must also be auto enrolled.

What happens if my employee is under 22, or earns less than £10,000 a year?

If employees don’t meet the auto-enrolment criteria, they can still choose to join the scheme anyway. The rules are only in place to determine who must be enrolled automatically, but other staff are allowed to opt-in to the workplace pension.

It means that you must provide a workplace pension scheme if you’re an employer, even if your staff don’t qualify for auto-enrolment.

We’ll go into this in a bit more detail later on when we look at eligible and non-eligible job holders.

How much are workplace pension contributions for employers?

The amount that you and your employees pay into a pension fund partly depends on the scheme you choose. When it comes to automatic enrolment, there are minimum contributions to pay. These are worked out as a percentage of the employee’s pensionable earnings.

Can I pay more than the minimum contribution into a workplace pension?

Yes, the minimum is just that. You or your employee are able to make additional contributions if the terms and conditions of the pension scheme allow this.

There may be tax implications for saving more than the annual allowance (£40,000) into a pension during a tax year. Find out more on the Gov.uk website.

 

Some employers choose to make higher pension contributions as a recruitment and staff retention tool. The economy, and the world of work, has changed dramatically over the years, and gone are the days when employees would work in one job for life. They’re now far more likely to move to a new employer every few years.

The workplace pension reflects the modern working world. Employees are more aware of the value of saving for retirement, and are keen to work for a company that offers a generous pension scheme. Contributing more than the minimum might just give you the edge if you’re desperate to attract the best talent.

What if I’m late enrolling my employee in a workplace pension scheme?

If you enrol an employee later than you should, you must ensure that you backdate the pension contributions so that they don’t miss out. In other words, they should be in the same position as they would’ve been if the delay hadn’t happened. Both the employee, and you as the employer, must make the relevant payments.

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How do I set up a workplace pension?

Setting up a workplace pension scheme can be seriously daunting, so we’ve broken it down into bitesize chunks. In very basic terms you’ll need to choose your pension provider, and assess your workforce.

First off, choose your pension provider

There are absolutely loads of workplace pension providers out there, and trailing through them can be a bit of a headache. Having said that, once you understand the key things you’re looking out for, it’s pretty easy to make a shortlist. They’re also generally quite helpful if you have any questions.

Most employers decide to go with a “defined” pension scheme. These pensions have long been thought of as the gold standard, plus they’re cost-effective to set up and maintain. We’ll look at this in more detail now.

Defined contribution versus defined benefit

Defined pension schemes are divided into two types. The first kind is called a defined contribution pension scheme, and the other is a defined benefit pension scheme. So, what’s the difference?

Defined Contribution Pension Schemes
Defined Benefit Pension Schemes
This type is the most common. The employer and employee both pay in, with the employee’s share taken from their salary every month. Again, with this type of pension, both employers and employees contribute each month.
The pension provider invests the money, so your worker’s ‘pot’ could go up or down in value. The more money is paid into the pension, the better off your employee will be in retirement.

Unless there’s a scheme manager in place, the employee will choose their own level of risk with their pension fund.

The amount an employee gets when they come to retire depends on two things:

  • How long the employee has worked for you.
  • What their salary amount is on their day of retirement (this may be a final salary or, more commonly, a career average).
A defined contribution pension scheme will typically be suitable for auto-enrolment. Unlike defined contribution pension schemes, defined benefit schemes are much less likely to take on any new employees for auto-enrolment.

What should I ask a pension provider?

There are a few really key questions you should ask here. Think of it like a job interview, where only the one which best suits your needs will do.

Who manages the pension?

Will employees be responsible for managing their pension (i.e., can they choose where their contributions are invested), or will there be a scheme manager to do it for them?

What are the fees and charges?

Pension providers generally take a fee as a percentage of the whole pension pot each year. Many will also charge an annual management fee, typically of around 0.3%.

Where is the money invested?

Where will the money actually go? Will it be invested in cash, shares, stocks, or property for example?

Is there a limit to how many employees you can add?

It’s worth going for one with either a very high limit, or no limit at all. After all, your organisation will hopefully grow over the years, so you need to make sure you won’t hit problems.

Now assess your workforce

As soon as your very first employee starts work, you must have a workplace pension in place for them. This is referred to as your ‘duties start date’. However, as we know already, you need to make sure they meet the eligibility criteria for auto-enrolment.

All your employees should have a contract anyway, and this is also their gateway to your company pension scheme. Their age, earnings and where they work will also come into play; we’ve touched on this a bit already.

These days money is tight for many people, and it may be that some employees are counting the pennies. Rightly or wrongly, a far-off retirement isn’t a top priority right now, so they may want to opt out. That’s fine, but you still need to sign them up in the first place. They can then opt out later on if they want to.

As a responsible employer, it’s your legal duty to make sure everyone who is entitled to a workplace pension can benefit from one.

What type of workers do you employ? For the purposes of pensions, businesses generally have three different types of workers:

Each of your employees will likely fall into one of these categories, and it’s your responsibility to give The Pensions Regulator evidence of every one of them. The only time you don’t need to worry about enrolling a worker onto your company scheme is if they are an external worker, and not directly employed by your business. They might be an agency worker or freelancer, for example.

Eligible jobholders – what are they?

Eligible jobholders are those people we mentioned earlier on, right at the start. They’re over the age of 22, earn more than £10,000 a year, and are contracted to work in the UK.

And a non-eligible jobholder?

A non-eligible jobholder will be:

Who would be classed as an entitled worker then?

Entitled workers are employees who can pay into a company pension, but who won’t be automatically enrolled. They will be contracted to work in the UK, and will also usually be:

Tax return services

What do I need to offer each type of worker?

Although you are responsible for offering each type of worker the chance to join a pension scheme, they don’t all necessarily need to be on your workplace one.

Eligible jobholders

All eligible job holders must be enrolled into a pension scheme by the time they start working for you.

They must be auto enrolled, but they can opt out within 30 days if they want to. Having said that, as a reasonable and responsible employer it’s well worth making them aware of the pension scheme’s benefits so they can make a really informed decision.

As part of their initial auto-enrolment, you also need to explain to them:

All the above information and more will be provided by whichever pension provider you decide to go with. It’s important that you communicate the details of the scheme to your staff, and keep everything transparent.

If an eligible jobholder decides to opt out, then the auto-enrolment process must be repeated after three years. They’ll have the opportunity to opt out again, and the process will continue to repeat on a 3-yearly basis.

Non-eligible jobholders

As we’ve already highlighted, non-eligible jobholders don’t need to be automatically enrolled onto your workplace pension. You must still pass on as much information as possible about opting in, or about how they can contribute to a separate pension scheme instead.

If they do decide to pay into the auto-enrolment workplace pension, as their employer you must pay in your contribution exactly as you would for eligible jobholders.

Entitled workers

It isn’t mandatory to enrol an entitled worker, though you should make it clear they’re welcome to join the pension scheme if they want to. This could be the same pension scheme used for other employees, or it could be a different one.

The big difference here though is that you can choose to contribute to an entitled worker’s pension, but it isn’t compulsory. If you would like to make contributions, make sure you look out for a pension scheme which lets both your worker, and you, pay in.

 

If you’re still struggling and would like to talk about your accounting requirements, we’re here to help. Simply get in touch with the TAP team by calling 020 3355 4047 or get an instant online quote. There’s support with payroll on offer if you need it too. Don’t forget: If you’re starting a new business, we’ll give you 40% off our accountancy services for 3 whole months!

About The Author

Suzanne Goodier-Dodson

I'm a Payroll Manager with a degree in Mathematics, responsible for overseeing every aspect of payroll for our clients. In my spare time, I love to travel and going to gigs. Read my Staff Spotlight.

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