Previously UK employers were not required to contribute to their employees’ pension schemes, however this is set to change with new laws which started to come into force from October 2012. As an employer, even if you employ just one person, you will be responsible for choosing a Qualifying Workplace Pension Scheme (QWPS) for your employees.
Why are the new rules being introduced?
Currently over 4 million employees are making no provision for their old age. As people are now living longer this means they are likely to enjoy a longer retirement. The cost of providing State Pensions and means-tested benefits for those in retirement is a huge financial cost to the Government, and therefore the Government has introduced these changes to workplace pension schemes. The Government is introducing the National Employment Savings Trust (NEST), which is a low-cost pension scheme that any employer can use to meet the new legal duties, which is primarily designed to help lower earning employees to boost their retirement income.
What is a Qualifying Workplace Pension Scheme (QWPS)?
A QWPS is a pension scheme for your employees, into which you and the employees will contribute, to provide them with an income to supplement their State Pension when they retire. It must meet minimum criteria in the following areas:
- Auto-enrolment of eligible employees
- All eligible employees must be auto-enrolled within 90 days of joining the employer
- A default investment fund
- A minimum total contribution, subject to the definition of qualifying earnings.
The main benefits for your workers are that you pay a contribution into their pension that is not taxed and that this is an easy and tax-efficient way for them to save.
When will the new rules come into force?
The start date for auto-enrolment is phased, based on the number of employees an employer has. The largest employers will be included from October 2012, with all employers covered by September 2016. The Pensions Regulator will contact you 6 to 12 months before your Staging Date and will provide further information on what employers need to do. You can visit the Pensions Regulator website to find your staging date.
Who needs to be enrolled?
Employers have to automatically enrol all workers who:
- Are not already in a qualifying workplace pension scheme;
- Are at least 22 years old;
- Are below state pension age;
- Earn more than £8,105 a year; and
- Work or ordinarily work in the UK (under their contract)
However, even if you do not qualify to be automatically enrolled, you still have the right to join the scheme. If you tell your employer that you would like to opt in to the scheme, they must allow you to do so.
Can Employees Opt Out?
Employees can opt out of your scheme at any time if they want to. If they opt out within a certain period (as defined by the rules of the individual pension scheme) any payments already made will be refunded to the employee. If they opt out after this, the payments already made will not be refunded and will remain in the pension’s pot.
Employees who have opted out, you can rejoin at a later date they you wish. Employers will also have a duty to automatically enrol employees back into the scheme every three years, (assuming you still meet the criteria for enrolment).
How much does an employer need to contribute?
The amount an employer needs to contribute depends on the type of scheme. The government has set a minimum percentage that has to be contributed in total. The total contribution is made up of contributions from the employee, the employer and the government (via tax relief). This minimum increases gradually between 2012 and October 2018 with a minimum total % that has to go into the pension pot with a defined minimum % that employers must contribute. These minimum percentages do not apply to all of your salary, but on what you earn over a minimum (currently £5,564) up to a maximum limit (currently £42,475). Employers will be able to contribute more than the minimum if they wish.