Choose the right workplace pension scheme for your business

Choose the right workplace pension scheme for your business

Business Finance

When should I enrol staff members?Under the Pensions Act 2008, every employer in the UK must enrol certain members of staff into a pension scheme and contribute towards it. As a business owner, it is your responsibility to know when your staff need enrolling into a workplace pension scheme and how exactly you go about doing it. This article aims to give you a clearer understanding.

Workplace pensions can go by different names, so it’s important not to be confused when further investigating them. The pensions can be called ‘occupational’, ‘works’, ‘company’, or ‘work-based’.

When should I enrol staff members?

The first thing you should know as the owner of a new business with regards to pensions, is that the pension regulator is responsible for ensuring that all employers comply with workplace pension law. So, being sure that you understand what needs to be done to abide to this law from as early a point as possible is important for you.

According to The Pensions Regulator, you are required to begin automatic enrolment when you have at least one member of staff employed for your business. They say, “Whether you’re an architect, a newsagent, have a personal care assistant or a nanny, you are an employer from the day your first member of staff started working for you and you have legal duties.”

They continue by going into further detail on exactly how new employers can begin to enrol their members of staff onto a pension scheme as soon as they’re required to.

“If you are employing staff for the first time, your legal duties for automatic enrolment begin on the day your first member of staff starts work. This is known as your duties start date. You should start preparing early in anticipation for this, so you know what you’ll need to do”.

Are there different workplace pension schemes to choose from?Are there different workplace pension schemes to choose from?

There are in fact two separate kinds of workplace pension schemes: defined benefit and defined contribution. As an employee, it will be down to your employer to decide which of the two schemes you will pay into each month.

As you may have guessed from the two names, a defined benefit scheme provides a specified payment amount (lump sum) in retirement, whereas a defined contribution plan allows employees and employers to contribute and invest funds over time to save for retirement.

Opt-in or opt-out?

As an employee, paying into a workplace pension shouldn’t be seen as a negative thing or a chore. You’re saving for your future and when you reach state pension age (currently 65 for men and 63 for women) you’ll likely be giving yourself a pat on the back for doing so.

The latest change in regards to workplace pension laws is that they used to be opt-in rather than opt-out. This change is actually an extremely positive one, allowing people to build for their own future without having to really think about it. In the most basic of terms, the change has basically shifted from people having to say they want to pay into a workplace pension scheme rather than having to ask to join one.

This change brought with it so many positives for employees, but it’s important to know that you can choose to opt out. While I couldn’t recommend opting out to anyone, you may be in a particular situation that means doing so will be beneficial to you. It’s a case by case scenario but there’s much success to be found with the new default automatic opt-in decision.

The payment breakdowns

When you join a workplace pension you’ll likely firstly want to know the actual who’s who in terms of payments. What you, your employer, and the government pay are all factors worth knowing. If something is coming out of your wages every payday you have the right to know what it is after all.

What you payWhat you pay

The amount of your own wages that will go into your workplace pension is dependant on multiple variables. It depends what type of workplace pension scheme you’re in and whether you’ve been automatically enrolled into one, or later chosen to opt-in.

GOV gives a useful example here:

You’re in a defined contribution pension scheme. Each payday:

  • you put in £40
  • your employer puts in £30
  • you get £10 tax relief

A total of £80 goes into your pension.

There’s also a handy Money Advice Services Contributions Calculator that you can use to work out anything you aren’t sure on.

What the government pay

The government will normally add funds to your pension savings in the form of tax relief. In order for this to happen however, you must pay income tax or pay into a personal pension or workplace pension.

What your employer will pay

If you have been automatically enrolled, both you and your employer must pay a percentage of your earnings into the chosen pension scheme. How much you pay and what counts as earnings depend on the pension scheme your employer has chosen. Ask your employer about your pension scheme rules.

In most automatic enrolment schemes, you’ll make contributions based on your total earnings between £6,136 and £50,000 a year before tax. Consider that your total earnings include not only your salary or wages, but also any bonuses and commission, overtime payments, statutory sick pay, statutory maternity, paternity or adoption pay.

If you pay 5% of your wages into your pension scheme, your employer must pay at least 3%, giving you a total of an 8% contribution, which is the total minimum contribution rate. This rate could go up in the future so keep your eyes peeled for any updates and changes the government decide to make.

Working life

You will build up a large amount of money if you stay with one company for an extended period of time, but what happens to the savings in your pension pot if you change job roles and begin to work for a different business? Well, good news, everything remains in your name and you’ll be able to combine any pension funds you have acquired over time.

If you were once paying into a particular pension scheme that you don’t necessarily have access to anymore, the pension still belongs to you. You’ll begin to receive payments from it once you reach the scheme’s pension age, as well as receiving funds from any other kind of pensions you have paid into while working.

There is also an option for people that are self-employed or individuals that are sole directors of limited companies. This is the National Employment Saving Trust (NEST).

The key points

  • You will now automatically be opted-in to workplace pension schemes
  • Business owners are responsible for enrolling employees
  • Two options – defined benefit pension scheme and defined contribution pension scheme
  • Minimum 8% total contribution rate in the UK for people that opt-in
  • Other options for self-employed workers and limited business owners

 

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