Auto enrolment for the SME

From April 2012, all employers who do not provide their employees with a ‘suitable’ pension workplace scheme will be required to auto-enrol them into the new personal accounts.

Everyone ‘must’ have a pension …

Much has been written about this new form of compulsory retirement saving, most of which has focussed on the poor value that they are likely to provide for the lower paid – who are the main target for it as the government thinks (rightly or wrongly) that they save less than the better off. It starts in less than three years time and many of the details are still to be decided – or at least published.

Those employers who do not offer a “Qualifying Workplace Pension” that provides at least 6% of earnings as an employer contribution and 5% as an employee contribution are likely to have to auto-enrol their employees into the new scheme.

What is a Personal Account?
Personal accounts will be based on earnings between a band, currently thought to be between about £5,000 a year and £33,540 a year. Employees will contribute 4% of band earnings and employers will have to put in 3%. A further 1% will be paid in the form of tax relief meaning that a total contribution of 8% of band earnings will need to be paid into a personal accounts pension scheme.

It is not yet clear precisely what the charges or investment options will be; the decision to introduce a strong element of compulsion in pension is largely based on recognition that most people simply do not save enough for their retirement. There is also, however, a strong element of the government seeking to reduce the cost of the Pension Credit on the exchequer, over the longer period, because any income from a Personal Account will, of course, reduce an individual’s ability to claim this top-up to the basic state pension.

Employees can “opt-out”

What will this mean for employers?
For employers, the introduction of Personal Accounts will result in additional administration – which will be far from welcome at a time when most are likely still to be trying to recover from the impact of a bank-failure-caused and government-borrowing-fuelled recession.

The cost of employing people – already set to rise by half a percentage point thanks to an impending hike in national insurance rates – will, of course, also rise by something like 2% (allowing for the fact that no contributions are made below the lower limit or above the upper one).

What if employees do not want to join?
Employees (but not employers) have the right to opt-out, but it will be the responsibility of employers to re-enrol people every three years, unless they again opt-out. Another layer of bureaucracy for employers to cope with.

What is the alternative?
For many employers, the most practical and cost effective option may be to ensure that their current pension scheme meets the rules to be a “Qualifying Workplace Pension” or to start a new scheme that does!

It is important always to seek independent financial advice before making any decision regarding your finances. For further information, please contact us .

NOTHING CONTAINED IN THE ARTICLE SHOULD BE CONSIDERED AS GIVING INDIVIDUAL FINANCIAL ADVICE. PLEASE NOTE THAT THERE MAY BE VARIATIONS FOR THOSE LIVING IN SCOTLAND AND NORTHERN IRELAND. 

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