Workplace pension reform

March 21st, 2014

As you will no doubt have seen on TV and heard on the radio, the government wants to encourage all workers to save for their retirement in as easy a way as possible, and it is because of this that they have introduced a new legal requirement for all employers to automatically enrol their eligible jobholders into a qualifying workplace pension scheme (if they aren’t already a member of one) without the employee having to do anything.

The National Employment Savings Trust (NEST) has been introduced by the Government for this purpose, although employers can instead choose an alternative pension scheme as long as it passes a quality test, based on a minimum level of contributions (or a minimum level of defined benefits) in order for it to be a ‘qualifying’ pension scheme.

Starting with the largest employers first and finishing with the smallest and new employers last, this requirement is being phased in between 2012 and 2018 for any employee who:

Is aged between 22 and state pension age; and

  • Has earnings above the personal allowance income tax threshold (currently £9,440); and

  • Works, or ordinarily works, in the UK under a contract of employment

Employees who fall into this category are called ‘eligible jobholders’ and must be auto-enrolled into a qualifying pension scheme within one month of the employers auto-enrolment date, which will be the latest of: The employer’s staging date (falling between October 2012 and February 2018) for any employees who are already eligible jobholders when the new employer duties first take effect; or

  • The date on which an employee first becomes an eligible jobholder if they attain that status after the employers staging date (for example, on someone with qualifying earnings reaching age 22); or

  • At the end of a waiting period, which cannot be longer than three months

Opting-out

If an eligible jobholder who has been auto-enrolled into a qualifying pension scheme wants to opt-out, they must give their employer a valid opt-out notice and as long as they do this within one month of the date active membership of the scheme commenced (or, if later, one month from the date their employer informed them that they had been auto-enrolled) they will be treated as having never been a member of the scheme and (if they had already made a contribution to the scheme) the amount of the contribution, less tax relief, will be refunded to them. Anyone who does opt-out, however, would of course cease to benefit from the employer contributions that would have otherwise been made on their behalf and if an an employee subsequently decides that they would like to opt back in after previously opting-out, the employer does not have to enrol them back in again until a year has passed since they last opted-out.       

Opting-in

If an employer operates a waiting period of up to 3 months, eligible jobholders can still elect to opt-in during this period.

An employee who is a jobholder, but not an ‘eligible’ jobholder, (for example, because they are aged under 22 or over State Pension Age or they are aged between 22 and State Pension Age but have earnings below the personal income tax threshold) can also choose to opt-in to by giving their employer appropriate notice.

Minimum Contributions

If the qualifying pension scheme is a money purchase arrangement (such as a group personal pension or group stakeholder) there is a minimum total contribution that must be paid into your pension pot. The amount is set by the Government, and is made up of your employer’s contribution, your contribution, and tax relief on your contribution.

If your employer decides to contribute the minimum required based on ‘qualifying band earnings’ the total contribution to your pension pot would be made up as follows.

   





   

Your employer pays 

You pay

The Government pays (your  tax relief)

Total minimum contribution from Oct 2018

1% of your qualifying earnings rising to 3% by 2018

0.8% of your qualifying earnings rising to 4% by 2018

0.2% of your qualifying  earnings rising to 1% by 2018

 8%



 

 

Qualifying band earnings (in 2013/14) are the amount you earn before tax between £5,668 and £41,450 a year, including salary, bonus, overtime, commission, statutory sick pay and maternity/paternity pay.

Given, however, that  ‘pensionable pay’ in many existing money purchase schemes is likely to be different to  qualifying band earnings an employer can instead certify that their scheme is a ‘qualifying’ scheme if it meets one of the following alternative minimum contribution levels (from October 2018) where earnings must be pensionable from £1 upwards:

  • Where only basic pay is pensionable – 9% (including an employer contribution of at least 4%); or

  • Where at least 85% of total pay is pensionable – 8% (including an employer contribution of at least 3%); or

  • Where 100% of total pay is pensionable – 7% (including an employer contribution of at least 3%)

Regardless of the method of pensionable pay that has been selected though, you and/or your employer can pay in more than the legal minimum and you can pay in less as long as your employer’s contribution means that at least the minimum will be paid in total. Your employer will tell you how the contributions will be calculated and how much they will pay but if you have any queries about auto-enrolment and how this can benefit you, we will be more than happy to discuss with you.

The value of investments can go down as well as up and you may not get back the value of your original investment

The tax treatment depends on the individual circumstances of the investor and may be subject to change in the future