Workplace Pensions – are you ready?

By Citroen Wells

New legislation, however good its intentions, can create an additional burden on business as they make plans to comply with it. Here Chartered Accountants Citroen Wells highlight the need for businesses to be making plans in readiness for the new Workplace Pensions as they begin to apply to larger firms. Smaller firms will be affected – and sooner than you may think. Given the decisions you need to be making in advance, Citroen Wells are, of course, ready to help should you need it.

Government estimates suggest that around 7 million people are not saving enough to provide themselves with an adequate retirement income and that almost half of working age workers are not contributing to a private pension. As a result the Government is attempting to reduce a perceived state burden and to boost individual retirement savings by means of automatic enrolment into a workplace pension scheme with effect from 2012/13.

Subject to qualifying conditions being met, in broad terms the eventual aim is for 8% of a worker’s earnings (between certain limits) to be contributed to a workplace pension – 4% from the worker, 3% from the employer and 1% from the Government (being tax relief on the worker’s contribution).

As with most Government proposals the devil is in the detail and to anyone without a working knowledge of the most arcane NIC regulations the detail is mind bogglingly complex!

Starting date

The good news is that the introduction of this scheme is to be phased with largest employers first and the smallest last. As payroll numbers fluctuate, the size of your payroll on 1 April 2012 will determine your starting or “staging date” Those firms with more than 20,000 qualifying employees should now be engaging with the new rules. By this time next year, those with more than 250 employees will need to be taking part. Those with 249 or less will phase in over the following three years. See table A below for details of staging dates.

Contribution levels

The level of contributions will start low (1% employee and 1% employer) and rise over time to the maximum of 8% after October 2018.  See table B for details of contributions phasing.

The contributions are payable if the worker earns more than an enrolment threshold (currently set at the £8,105 personal allowance) and are calculated on a band of earnings (“qualified earnings”) (currently set at £5,564 and £42,475) rather than on the whole gross salary. (For 2013/14 these three figures will be £9,440, £5,668 and £41,450 (yes a fall!) respectively). So the maximum employer contribution per worker will be in the region of £1,100 (3% of the approximate 2013/14 £36,000 band).

Assessing your workforce

We recommend doing this well in advance to establish the extent to which you are likely to be affected.  Also you need to do it to determine the size of your payroll to work out the staging date.

Identification of “workers” will depend upon contractual relationships and may include self-employed individuals and agency staff.  Exemptions include office holders, one person companies, the armed forces and most volunteers.  Workers are then categorised as “job holders” (who may be “eligible” or “non-eligible”) and “entitled workers”.  Job holders are aged between 16 and 75, ordinarily work in the UK and have qualifying earnings.  For “eligible job holders” aged between 22 and state pension age (SPA) enrolment is automatic.  Also bear in mind, however unlikely, that some of your staff who are not automatically included may wish to opt in voluntarily – see matrix C.

Appropriate pension scheme

Having established that your workforce may be affected your intended workplace pension scheme should then be assessed for suitability.  It may be possible to use an existing scheme provided the scheme rules have been amended accordingly.  For example, there must be no possibility to require employee consent or to exercise choice as to which scheme to use.  It is expected that the big pension providers will use this as a marketing opportunity and offer suitable products (similar to stakeholder pension schemes several years ago).  A Government scheme NEST (National Employment Savings Trust Corporation) has been created specifically to cater for this.  Existing pension arrangements that satisfy certain criteria in excess of the minimum requirements may be ‘certified’ annually and used in place of auto enrolment.

You should also consider whether your payroll software (or bureau) is sufficiently robust and has the functionality to deal with this, e.g. identifying when an eligible job holder attains 22 or reaches state pension age.

You should also be aware that as part of this initiative the Government is keen to ensure the maximum take up.  Consequently although workers are allowed to opt out (under certain circumstances) the employer is strictly forbidden from influencing or assisting them to do so in any way (including during the recruitment process) and penalties may be levied on employers for so doing with effect from July 2012.  Only the pension scheme providers may assist a worker with opting out.

For flexibility, say to align financial or operational calendars, an employer may choose an earlier (but not later) staging date. In addition an employer may sometimes postpone an individual’s automatic enrolment date by up to three months provided the individual is notified accordingly.

Annual and Lifetime Allowances

Your more financially sophisticated employees – maybe including yourself – need to be careful with auto-enrolment and be aware of the annual and lifetime allowances for pension contributions. In particular, when the lifetime allowance was introduced at £1.5m with effect from 5 April 2006, rose to £1.8m by 2010/11 and reduced from £1.8m to £1.5m from 6 April 2012, members could make elections to preserve their existing pension rights. One of the conditions for doing this was that no further pension contributions would be made. An employee affected therefore needs to opt out of auto enrolment otherwise the annual allowance election is invalidated and they will be subject to a penal tax rate of 55% on the excess of the value of the pension fund over the lifetime allowance when they start taking pension benefits. To make matters worse the lifetime allowance is set to reduce to £1.25m from April 2014.

Although the lifetime allowance is levied on the employee, in practice an employee losing the protection may blame the employer, so it is good practice to ensure that employees have the necessary information to appreciate the potential problem.

About Citroen Wells

Established in 1952, Citroen Wells is an experienced and proactive firm of chartered accountants based in London’s West End. We pride ourselves on our proactive and personal approach, and will work closely with you to provide a service that is tailored to your individual needs. The purpose of this article is to make you aware of the general terms of the requirement.  For further advice please contact your advisor or make contact with Citroen Wells – www.citroenwells.co.uk .

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