Hunt4Staff.com: pensions; trying to make sense of the future
Guest Blogger: Guy Jones
Before committing finger to keyboard I decided to ask around my Independent Financial Advisor (IFA) colleagues to try and get a consensus on who should be doing what and by when. Sadly the only consensus was that there was no one answer to the question, “it depends” was the most common response.
Words like “Auto Enrolment” and anachronisms like “NEST” are being banded about, but where to start?
From 1 October 2012 (subject to the employer’s own introduction date), all eligible workers will have to be auto-enrolled into a qualifying pension scheme. Employers can choose the qualifying scheme they use, which could include NEST (the National Employment Savings Trust).*. Each qualifying scheme must meet minimum standards in respect of the benefits it provides or the amount of contributions paid to it. The scheme must also provide auto-enrolment for all eligible workers, and for all new workers when they become eligible.
* NEST – is a low cost trust based scheme which has to meet certain criteria.
The new employer duties are planned to come into force from 1 October 2012. Under these duties, employers will have to:
- Enrol eligible workers into a qualifying workplace pension arrangements
- Choose the qualifying scheme(s) they adopt to discharge the newly arising duty; and either
- Make a minimum 3% contribution towards a defined contribution scheme (based on qualifying pensionable earnings) or NEST (the National Employment Savings Trust); or
- Offer membership of a defined benefit scheme or certain hybrid scheme which either has a contracting out statement or meets the test scheme standard. An eligible worker is an employee aged between 22 and state pension age and earning above the income tax personal allowance (£7,475 in 2011/12). Contributions will be payable on earnings between £5,035 and £33,540. Employers will also have an ongoing duty to maintain qualifying pension provision for workers who;
- Are already members of qualifying schemes; or
- Become members of such schemes.
Although new duties come in from 1 October 2012, individual employers’ own duties will be introduced gradually over the following years and will be based on the size of the employer, typically by PAYE size.
The following is a table showing the staging dates for employers with 3,000 or more employees. The Government is revising the staging dates for employers with less than 3,000 employees and further information will appear in the second half of 2012.
Employer (by PAYE scheme size):
- 120,000 or more – Staging Date: 1 October 2012
- 50,000 to 119,999 – Staging Date: 1 November 2012
- 30,000 to 49,999 – Staging Date: 1 January 2013
- 20,000 to 29,999 – Staging Date: 1 February 2013
- 10,000 to 19,999 – Staging Date: 1 March 2013
- 6,000 to 9,999 – Staging Date: 1 April 2013
- 4,100 to 5,999 – Staging Date: 1 May 2013
- 4,000 to 4,099 – Staging Date: 1 June 2013
- 3,000 to 3,999 – Staging Date: 1 July 2013
Other companies with smaller employee levels have a little longer and staging dates are still being finalised.
There will be a three month waiting period before employers are required to enrol workers into their designated scheme. During this period, workers can choose to opt in to start saving straight away.
The largest employers who are due to auto-enrol between 1 October 2012 and 1 November 2012 will be allowed to start auto-enrolment from as early as July 2012 to avoid the Christmas period.
Employers will be given the flexibility to re-enrol workers three months either side of their automatic re-enrolment date.
Minimum Contributions for Defined Contribution schemes and NEST
Where a worker is automatically enrolled in a defined contribution (DC) scheme or NEST, there will be a minimum contribution of 8% of qualifying earnings, of which the employer must pay a minimum of 3%. If the employer chooses to pay the minimum 3%, the worker will pay 4%, with a further 1% paid as tax relief by the government. (Qualifying earnings is earnings between £5,035 and £33,540).
However, these minimum contribution levels will be phased in between October 2012 and October 2017:
- October 2012 to September 2016 – total minimum of 2% of qualifying earnings with at least 1% from the employer
- October 2016 to September 2017 – total minimum of 5% of qualifying earnings, with at least 2% from the employer
- From October 2017, total minimum of 8% of qualifying earnings, with at least 3% from the employer.
Workers will be able to opt-out of their employer’s scheme if they choose not to participate. Workers who give notice during the formal opt-out period will be put back in the position they would have been in if they had not become members in the first place, which may include a refund of any contributions taken following automatic enrolment.
Auto-enrolment is being regulated by the Pensions Regulator. Their website contains further useful information, as well as some handy interactive tools.
NEST will be a trust-based defined contribution occupational pension scheme. It will be regulated in the same way as existing trust-based defined contribution schemes.
NEST will provide people with access to a simple low-cost pension scheme. The charges are expected to be:
- A 1.8% charge on the value of each contribution to cover NEST’s start-up costs; and
- An annual management charge of 0.3% of the value of the fund.
Transfers in and out of NEST are not allowed (except in specific limited circumstances). This will be reviewed in 2017.
Based on the information above the minimum contributions to provide a qualifying scheme would involve 8% pension contributions to be made to employee pensions.
The pension contribution setup going forward is entirely up to the company and I would work around an 8% contribution.
The value of the benefits to the employees will depend on Salary and which method is chosen to contribute to the pension scheme in place.
As in most Financial circumstances there are no short answers and the “it depends” response I have received from my colleagues seems to be leading me to suggest that if you have not already asked your Pension Advisor then do so as your scenario will not be the same as someone elses.
This is something that will affect every employer and employee in one way or another so act now.
Also be mind full that at the end of this year the way IFAs are paid changes and their fees will need to be added to your pension contributions instead of coming out of them as they do now. Retail Distribution Review (RDR) comes into effect in January 2013.
I would like to thank Alex Morris from Financial Relationships LLP for his considerable input into the preparation of this article without whom I would still be sitting here scratching my head!