Spending money today, such as on expensive products or trips, instead of investing for retirement is acceptable. But prioritizing retirement savings implies having a pension that offers a comfortable level of life. This is where workplace retirement plans come in.
You help your workers save by automatically contributing a portion of their income to a pension fund and, in many instances contributing a little more.
This article explains why workplace pensions are an appealing benefit to provide your workers, how to pick a pension program and your obligations as an employer.
Accountability of the employer
Since 2017, it has been a legal necessity for employers to have a workplace pension system in place from the day their first employee begins working for them. The term for this is automatic enrollment.
All new employees must join the program if they are:
- Between the ages of 22 and the State Pension age
- Earn a minimum of £10,000 every year (or the equivalent in a pay period)
- Typically employed in the UK
It is, therefore your obligation to monitor eligibility changes and maintain records of:
- The names, ages, residences, and incomes of all registered individuals.
- The date on which donations are deposited.
- Any applications to join or depart
- Your pension scheme number or registry reference
All of these documents must be retained for six years, except for petitions for separation, which must be kept for just four years.
Finally, you are required to re-enroll any former employees every three years.
You must also submit an online re-deceleration form to the Pension Regulator.
How much do I contribute to a worker’s pension?
At least 3 percent of each employee’s pensionable earnings must be contributed. If you have established a “qualified pension,” you may limit pensionable earnings to between £6,240 and £50,270 (for the tax year 2022/23) – into their pension fund. Using a “Qualified pension” indicates that pensionable earnings include bonuses, commissions, overtime, sick pay, and parental leave compensation. Your employee must contribute at least 5%.
When selecting a pension provider, you can pick a “qualified pension plan” or create one tailored to the requirements of your workers. The supplier of your pension will be able to assist you with this.
During statutory maternity leave, employer pension contributions are subject to special regulations. Employer payments must be based on the employee’s salary and earnings before maternity leave. For example, an employee’s maternity leave does not result in a reduction in employer payments.
Can employees leave the pension scheme?
Yes, employees can ask to leave the pension scheme at any time, and you must remove them within one month of their request.
If this is within one month of them becoming an active member of the pension scheme (their opt-out window), you must refund any contributions they’ve made in that time. The pension provider will also refund the contributions made by you and the employee. If they leave after the opt-out window has closed, the funds will remain in their pension until they retire.
Why it’s an attractive benefit to offer employees
A workplace pension scheme might be a legal requirement, but it’s also the most commonly advertised work perk on job adverts, according to a recent survey from Moneypenny. Of 1,000 analyzed adverts, 41% offered a pension as a benefit, putting it ahead of both working from home (22%) and flexible working (12%).
Even though it’s obligatory, it’s good to advertise to potential employees that you’re meeting your responsibilities as an employer.
Choosing a pension scheme
There are several factors you should pay attention to when choosing a workplace pension scheme.
Can it be used for automatic enrolment?
To be eligible scheme, your employees can’t be asked to do anything to join the scheme. The pension regulator has a list of suitable pension providers.
How much does it cost?
Both you and your staff will be charged to use the scheme, so it’s important to compare the costs of various providers and find one that complements the way you run your business.
For example, some schemes charge you a monthly fee, and some charge one up-front cost, while some charge lower-paid staff and lower management fees than bigger earners. Staff may also be charged an exit fee if they leave the scheme. The costs are usually deducted from the pension contributions made.
Is it regulated by the Pension Regulator?
This is important as it’s proof that the scheme has a high standard of administration.
What tax relief method does it use?
There are two types: relief at source (tax relief is claimed from HMRC by the pension provider) and net pay arrangements (you calculate Income tax after pension deductions). Choose whichever works best for your employees and their salaries. The pension provider will determine which tax relief method is used.
As per the pension regulator the method you choose will affect your lower or higher-paid employees in different ways:
- An employee who does not pay income tax will not receive any tax relief in a Net Pay Arrangement, but Net Pay Arrangement tends to have lower member changes.
- Employees who are subject to higher or additional Income Tax will receive that additional relief directly via a Net Pay Arrangement. If they are in a Relief at Source pension scheme they can claim their full tax relied on completing an Income Tax self-assessment.
Does it offer investment choices?
Any pension scheme used for auto-enrolment must offer a default investment fund, though staff who’d like to choose their own investments should be able to do so
Using payroll software for automatic enrolment pension schemes
Using HMRC-recognised payroll software that’s set up for automatic enrolment is a great way to manage your ongoing pension responsibilities as an employer. It can:
- Store the date of birth, salary, National Insurance number, and contact details of eligible employees
- Automatically send these details to your pension scheme provider
- Calculate pension contributions for each pay period
- Calculate the correct tax relief
- Track requests to leave or join the pension scheme
- Monitor the eligibility status of employees
- Generate payslips and other documents
Not all payroll software is equal when it comes to pensions. Make sure you thoroughly investigate the features of any payroll software you consider using before committing to a subscription.
Communicating the plan to personnel
According to the law, you must notify your workers that they have been enrolled in a pension system within six weeks of the day you assume your obligations.
The letter should include a description of how the pension system operates, their enrollment date, and extra information from the provider. Your supplier should be able to give you a packet of material that you may distribute to your staff. The pension regulator provides draft templates for usage.
Conformity and regulation
Within five months after the date on which your employer responsibilities begin, you must submit a statement of compliance to the Pensions Regulator detailing how you’ve fulfilled these responsibilities. You should be able to do this online in as little as 15 minutes if you have your PAYE reference and accounts office reference number.
To stay compliant, you must fulfill the tasks outlined in the section on employer responsibilities.
