Workplace pensions auto-enrolment for small businesses
Does your auto-enrolment staging date still seem a long way off? Are workplace pensions even on your radar yet? For employers and employees alike, the time to take action on auto-enrolment is here.
Too few of us are saving for retirement, and auto-enrolment is the Government’s flagship initiative to address this. It makes it compulsory for employers to enroll eligible workers into a workplace pension – and to contribute to that scheme. For employees, this is likely to be an ideal time to take stock of your retirement plan as a whole.
The scheme is currently being phased in according to company size, and you can find out your staging date by entering your PAYE reference number into the Pension Regulator’s Staging Date Calculator. A word of warning on staging dates for employers: this isn’t your cue to pencil in a reminder to ‘do pensions paperwork’ a few weeks before you hit the date. The official advice is to start planning your implementation at least 12 to 18 months in advance, and the experience on the ground suggests that this advice is worth following.
It’s happening now – so how are UK businesses dealing with it?
The Pensions Regulator has already overseen the auto-enrolment of more than half of the UK’s estimated 10 million workers eligible for the scheme. Here’s what SMEs can learn from what’s been happening so far:
The threat of sanctions is real. 166 Fixed Penalty Notices and 1,139 Compliance Notices in the final quarter of last year shows that the Pensions Regulator is quick to take action in the event of non-compliance. The infographic demonstrates the potential financial impact of this on small businesses. Make sure your firm is not sleepwalking towards a penalty.
More than half of firms who have already enrolled regret not having earmarked more time for the process.
So far, the proportion of employees opting out of workplace pensions is lower than expected, at approximately 10%.
Preparing for staging: assess, review and communicate…
Assess your workforce
Those employees who are aged between 22 and the state pension age, and who earn the equivalent of £10,000 will need to be auto-enrolled. But what are your costs for roll-out?
At present, the legal minimum employer contribution is 1%, although research suggests employers are contributing an average of 4.5%. Ask yourself: do you intend to exceed the minimum requirement, and if so, will your organisation-wide remuneration policy need to be revised?
Review your existing provisions
Ensure you get help with choosing the best solution for your organisation. Existing schemes may not necessarily be compliant with auto-enrolment. Also, effecting a changeover to a new scheme can be a less than straightforward process. The Pensions Regulator predicts that the pressures on intermediaries, including accountants, payroll bureaux and payroll software providers, will increase as lots of smaller firms get closer to their staging dates. Get advice early and avoid a last-minute scramble for help.
Communicate with employees
Employers are required to choose a default investment option: i.e. a suggested investment model for those individuals who would not otherwise have given any thought to their investment plans. You are also required to write to each employee, telling them how the scheme works, and informing them of their rights.
Employees: keep your wider goals in mind…
Tax relief can be claimed on contributions up to £40,000, and there is the potential to carry forward unused allowances in certain circumstances. Opting out of auto-enrolment is a possibility, but is it tantamount to turning down ‘free money’? Bear in mind that by October 2018, the minimum employer contribution into workplace pensions will be set at 3% of qualifying earnings, and if current trends continue, many employers will be routinely making voluntary contributions in excess of this.
Remember that default funds are selected on the basis of their ability to achieve average growth levels, and sticking with this ‘one size fits all’ approach might not be the best option for you. Should you consider switching to a fund with a higher risk profile? Is this the time to consolidate existing pensions in one place? Consider workplace pension decisions in the context of your wider portfolio to avoid losing sight of your investment goals.
Want to find out more about pensions, PAYE and the financial implications of employing staff? Check out our help centre for lots of no-nonsense advice on what it takes to get a new business off the ground.