Automatic enrolment

From 2012 to 2016, all employees must be auto-enrolled into a qualifying workplace pension scheme. Employee contributions need to be managed by the employer and they also need to make contributions themselves.

Because it is called ‘auto-enrolment’, this means that employees face no decision to make when joining. Employers must check all employees for eligibility, with the eligible employees being:

  • Aged between 22 and the state pension age.
  • Not part of an existing pension scheme that qualifies.
  • Those who earn over £7,475 per year (figure may rise each year)

Qualifying pension schemes include Group Personal Pensions, Stakeholder pensions, Final Salary schemes and NEST. You aren’t required to use NEST if you currently have a qualifying scheme.

Minimum contributions have been put in place by the government for each scheme so it just depends on which one you choose.

It is an obligation of employers to enrol employees who are eligible into a scheme although the employees can opt out at any time and use a personal pension scheme if they would like to. Employers are not obligated to contribute to this.

If you are aged 16 to 21, earning less than £7,475 per year, or over the age of state pension but are under 75 you will be treated differently.  People who fit this criteria don’t have to be enrolled automatically but can be asked to be and for employers to contribute for them.  If you earn lower wages you can have a pension arranged for you but you not be required to pay towards.

So what does this mean for employers in the UK?

Because more employees are auto-enrolled, the memberships of pensions will increase. If your company doesn’t offer a scheme, you should get planning now, as costs will probably increase. Those who contribute already might discover that costs rise with the number of pension memberships.

Big companies have had auto-enrolment since October 2012 with other companies having until 2016 to get on board.

The plan is to gradually put in place compulsory contribution levels, which begin at 1%, rise up to 2% in 2016 and again rising to 3% the year after.

**Less Tax

The process of staging does not affect you if you use a defined benefit scheme or hybrid.  Using one of these means you won’t have any ability to pay contributions gradually at a rate that is reduced.

These schemes will possibly be effective once the staging process is reaching its end.

*The Employers Pension Survey 2005

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