UK Company Pension rules have been in the news for the past few years, particularly that the UK population are not making sufficient financial provision for their retirement and with longer life spans many people run the risk of not being able to live comfortably when they retire. The Government have taken steps to ensure that employees are members of a pension scheme and do not solely rely on state pensions.
The Pensions Act 2008 requires all employers to set up and contribute to a workplace pension scheme for anyone they directly employ. This legislation applies to any employer who has one or more members of staff. This is called “Automatic Enrolment”.
Companies must have a pension scheme in place once their “automatic staging date” has been reached. The automatic staging date for companies was set in 2012 and the larger employers were required to have pension arrangements in place at an earlier date than smaller employers.
There are different pension schemes and providers that a company can choose from and care must be taken when selecting the scheme. However, whichever scheme is selected it must satisfy the Pensions Act requirements.
There is a minimum contribution that both the employer and eligible employee must pay into the pension scheme and these minimum contributions will increase each year until April 2019. The contribution rates are:
|Effective Date||Employer Minimum Contribution||Staff Contribution||Total Minimum Contribution|
|Until 5th April 2018||1%||1%||2%|
|6th April 2018 to 5th April 2019||2%||3%||5%|
|6th April 2019 onwards||3%||5%||8%|
The employer will deduct pension scheme contributions directly from the employees’ earnings.
The government may decide to increase contribution rates in the future
Companies will be required to pay contributions for employed eligible staff only. Generally, if the business deducts tax (PAYE) and national insurance contributions they will be an employee of the company. However, there are “tests” for businesses to ascertain whether someone working in a company is or is not an employee. These tests include the degree of control a business has over the work done and if there is a “mutuality of obligation”, including the employer’s obligation to provide work and the employee’s obligation to do the work.
Staff that are contracted by the employer from third parties, such as employment agencies, will not be covered by these requirements.
Employees who are eligible to join a pension scheme are those:
- not already in a workplace pension
- aged 22 or over
- under State Pension age
- earn more than £10,000 a year
- work in the UK
Employee pension contributions will attract tax relief up to a certain level of contribution.
Employees will automatically become members of the pension scheme but they can choose to opt out of the scheme. The employee needs to write to the employer stating that they do not want to join the scheme. However, the employer must automatically re-enrol the employee after three years after the automatic staging date and at regular intervals thereafter. The employee can repeatedly opt out of the pension scheme.
The options open to the employee will depend upon the pension scheme but will tend to be one of the following:
- leave the pension behind with the employer’s scheme and be paid it when the employee retires
- transfer the pension rights to a new occupational pension scheme
- transfer the pension rights to a personal pension.
There are financial penalties for businesses that fail to comply with this legislation. Any business thought to be evading their pension responsibilities and auto enrolment duties will be investigated. Companies will be required to respond to information requests regarding pension arrangements and can face penalty notices starting at £400, rising to £10,000 per day, depending upon the number of staff employed. Companies will also be required to pay outstanding contributions from the date of legislation or commencement of employment for each employee if employed after the introduction of the legislation.