What Is Auto Enrolment

Why It Is Important To Save For Your Post-Retirement Life

Everybody hopes to have a nice tidy sum stashed away safely, so that they can indulge themselves in the post-retirement part of their life. The reality though is that more than 50% of people in the UK are not living a standard a life that they had hoped for after retirement. Can you guess the biggest reason why such a large proportion of people are dissatisfied with their financial situations post retirement?

Lack of savings.

Simply put a number people in the country are taking no steps whatsoever to save for their post retirement life and then are in for a rude shock when they realise that their maximum basic State Pension is insufficient to meet the standard of lifestyle they desire. What options are you left with when you find yourself in such a precarious financial situation post retirement? The following spring to mind immediately:

  • Delaying your retirement
  • Start saving more
  • Lower down your expectations about the kind of lifestyle you wish to lead after your retirement.

Do Not Let Your State Pension Hold Your After Retirement Lifestyle To Ransom!

Effective from 6 April 2016, the maximum basic state pension one can expect is £155.65 per week and as you have probably guessed this amount is in no way sufficient to fund for your post retirement life. It is advisable to start saving into a pension scheme now.

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The Benefits Of Saving Into A Pension

A pension is basically a long term saving plan you initiate for yourself and it comes with tax relief.  The regular contributions you make in your pension account will be invested, so that it grows over the time period of your career, which will then provide you with a sizeable income when you decide to hang up your boots.

 From age 55 you will be able to gain access to your pension amount.

How Your Employer Will Top Up Your Pension Amount

To encourage more number of people to start saving for their post retirement life, employers are now legally required to enroll their employees into a workplace pension scheme, which is also known as automatic enrollment.

If you say no to a workplace pension scheme, especially one in which your employer is making their own contribution, it would be akin to refusing an offer of a pay rise. So, unless you are dealing with crushing, unmanageable debt, it would be unwise to opt out of a workplace pension scheme.  

Even if you don’t make payments towards your pension account, your employer is still obligated to make their payments in it.  You can make payments based on your financial condition at the time. Generally, about 25% of your total pension savings can be considered as tax-free.  Now if you have built up your pension amount through a defined contribution scheme rather than a salary related one, you can do whatever you wish to with your pension pot after the age of 55.

Tax Relief Received On Pension Payments Help Swell Your Overall Savings Amount

As you receive tax relief on your pension contributions, it means that you no longer have to pay a percentage of that amount in the form of tax to the government. While you are allowed to put as much money as you wish in your pension pot, it is important to remember that, there are lifetime as well as annual limits on the amount of tax relief you will receive on your pension contributions.

How Much Tax Relief Will You Receive On Annual Pension Contributions?

If you are a tax payer in the UK during the year 2016-17, the standard norm is that you will receive 100% tax relief on your pension contributions or an annual allowance of £40,000, depending on whichever is the lower amount.

For example, if your annual income is about £20,000, but you have contributed about £27,000 in your pension amount perhaps aided by certain additional savings, you will receive tax relief only on your annual income, which is £20,000.

Likewise if your annual income is in the range of £60,000 and you decide to put the entire amount into your pension scheme, you will be entitled to tax relief on £40,000. Any contribution you make over this account will be subject to income tax at the highest rates you pay.

But, you are permitted to carry over unused allowances from the last three years, as long as you were a member of a pension scheme during that period. 

However, there is one important exception to this rule. In some situations your annual allowance lowers to £10,000, if you have opted for a defined contribution pension scheme.

Post April 2016 £40,000 of annual allowance will be lowered if your annual income is over £150,000. This amount also includes your pension contributions.

MPAA (The Money Purchase Annual Allowance)

From the year 2016-17, your annual tax free allowance might be lowered if you start to withdraw money from your defined contribution pension.  If this occurs, you will be entitled to tax relief on 100% of your earnings or £10,000 whichever amount is lower.

Whether or not this lower annual allowance applies to you depends on how you gain access to your pension savings and honestly the rules surrounding this can be a bit complicated. But to have a good general idea of when you might trigger MPAA, you can refer to the points mentioned below:

  • If you start to withdraw ad-hoc lump sum amounts from your pension account.
  • If you transfer your pension money into an income drawdown fund and then start to withdraw from it.

You wont trigger MPAA if:

  • You take a tax exempted lump sum amount to buy an annuity, which is an insurance product that will guarantee you an income for life.
  • You take tax exempted cash lump sum and then transfer your pension money to an income drawdown fund, but you do not make any withdrawals from this fund.

It is important to remember that you won’t be able to transfer your unused MPAA to the next financial year.

Also, this lowering of the annual allowance amount to £10,000 only occurs if you have opted for defined contributed pensions instead of defined benefit pension schemes.

Consider the following examples:

  • If your annual income is £20,000 and you have contributed £8,000 of it into your defined contribution pension plan for the financial year 2016/17, along with the tax relief you will receive on this amount you will also be entitled to tax relief of up to £12,000 of the contributions you have made into your defined benefit pension plan.
  • If your annual income is £50,000 and you have contributed £12,000 of it into your defined contribution pension plan for the financial year 2016/17, you will be the recipient of tax exemption for only £10,000 and you will have to pay income tax for the remaining £2,000.  Additionally you can make payments of up to £30,000 into your defined benefit pension plan and also be entitled to tax relief on these payments.

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If You Are Not A Tax Payer, Are You Still Entitled To Tax Relief?

Yes, you are still entitled to tax relief for contributions made into a pension plan up to a certain amount.

You can pay a maximum amount of £2,880 per year or 100% of your earnings, which is subject to your annual allowance.

You will receive £3600 per year into your pension scheme, if you have paid £2,880 per year. This is because tax relief is added on to your pension contributions.

How Much Of A Pension Pot Can You Build For Yourself?

There is a lifetime limit on the amount of pension benefits that you are eligible to receive without having to pay tax. This puts a top limit on the amount of tax free money you receive.

As of 2016-17 this lifetime allowance limit is set at £1 million. Any figure above this amount is subject to 25% tax charge if paid as pension or 55% if paid as lump sum.

From October 2012, a new system is being phased in gradually which forces employers to automatically enroll eligible workers into a workplace pension scheme.  This workplace pension scheme musty consist of a minimum total contribution comprising of:

  • The employers contribution
  • The workers contribution
  • The Governments contribution in the form of tax relief

What Is Auto-Enrollment?

As we have said previously, the government has initiated auto-enrollment to encourage more people to save for their retirement and by taking this step, it has introduced major alterations to how workplace pensions operate.

Previously it was the workers choice if they wanted to opt into their employer’s pension scheme. However, due to auto-enrollment all employers are now required to enroll eligible workers into a workplace pension scheme automatically that is unless a worker manually opts out of the scheme.

This will result in many more people in the UK building up a sizeable retirement pot through their pension savings, which should cover for all their post retirement needs without them having to make compromises on the type of lifestyle they wish to lead.

When Does It Start?

Auto-enrollment is being initiated in phases up until 2018.  The largest employers will have to start first, who will then be followed by medium sized and then small sized employers.

If you have not already been enrolled into a workplace pension scheme, make sure that you ask your employer about when it will happen or if you are eligible to be automatically enrolled into a workplace pension scheme. 

Irrespective of whether you are employed on a fulltime or part time basis, your employer will have to automatically enroll you into a workplace pension scheme if you:

  • Work in the UK
  • Are not already enrolled into a workplace pension scheme
  • Are 22 years old at the very least, but fall under the state pension scheme
  • Earn in excess of £10,000 each year

You should be covered by a workplace pension scheme irrespective of whether you are employed on a short term contract or whether an external agency is paying your wages or if you are away on adoption, maternity or carers leave, as long as you fulfill the criteria mentioned above.

If your annual income is less than £10,000 each year but above £5,876, you can opt in to your employers workplace pension plan, and your employer cannot refuse your wish and must make contributions into your pension plan.

Do You Have Any Say On Whether Or Not You Want To Be Automatically Enrolled? 

Yes, of course you have a choice. It is possible for you to opt out of the workplace pension plan after you have been automatically enrolled by your employer.

 But remember, if you decide to opt out, you will miss out on your employer’s contribution into your pension pot along with the government’s contribution via tax relief.

If you are firm on your decision to opt out of the workplace pension scheme, ask your employer for an opt out form. If your employer has outsourced auto-enrollment to a payroll company, ensure that you return the completed form directly to your employer and not the payroll company.

If you are opting out from a workplace pension scheme within a month of being enrolled into one, any contributions you have made into the pension fund will be refunded back to you.

After the first month, you can still choose to opt out of a workplace pension plan whenever you want. The only catch in such a situation is that any payments made by you into your pension pot will not be refunded instantly. Instead the amount will remain in your pension pot for retirement. You always have the option of rejoining your employer’s workplace scheme at a later date, if you wish to do so.  

Legally your employer is required to enroll you back into a workplace pension scheme after a period of three years provided you remain eligible to be auto-enrolled.

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How Much Of A Contribution Will You Be Required To Make?

Your pension amount must consist of a minimum contribution made by you, your employer and the government via the tax relief it grants.

Currently this minimum contribution has been set at 2% of your annual earnings, which comprises a 0.8% contribution made by you, 1% by your employer and 0.2 % by the government in form of tax relief.

This amount is predicted to increase in 2017 and 2018.

This minimum contribution is applicable to any amount you earn over £5,824 in the 2016-17-tax year, up till a limit of £43,000. This amount includes bonus and overtime payments.  For example, if your annual income is £20,000, your minimum contribution will be a percentage of £14,186, which is the difference between £20,000 and £5,824. The percentage of your earnings you will be required to contribute into the workplace pension plan will be informed to you by your employer.

If you are informed of this amount as a percentage, you can evaluate how much it comes to in pounds by using our workplace pension calculator.

Increase in the Minimum Contribution

Currently the minimum contribution has been set at 2% of your annual earnings, which comprises a 0.8% contribution made by you, 1% by your employer and 0.2 % by the government in form of tax relief.

However, from April 2018 this amount will increase as follows:

  • April 2018 to March 2019: 5% of your annual income which comprises a 2.4% contribution made by you, 2% by your employer and 0.6 % by the government in form of tax relief.
  • After March 2019: 8% of your annual income which comprises a 4% contribution made by you, 3% by your employer and 1 % by the government in form of tax relief.

Confused About Whether Or Not You Should Stay In Or Opt Out Of A Workplace Pension Plan?  

Don’t be. Remember that for most people workplace pension is a great idea, especially if the employer and the government are making additional contributions. It’s a great way to save for your retirement, so that you can comfortably be able to afford a lifestyle you desire. 

However, in certain scenarios it might be better to opt out of a workplace pension plan. For example, if you are dealing with a scenario of severe unmanageable debt.

Why Is It Happening?

Primarily to encourage workers to save up for their retirement.  It has long been acknowledged that a vast majority of the people residing in the UK have not been saving enough money for their life post retirement and hence have been forced to live a compromised lifestyle on their state pension.  As people are living longer these days, this causes an additional strain on the benefits system provided by the state. This makes implementation of a private pension program even more important.

To help motivate workers to start saving up for retirement benefits, the Government initiated widespread pension reforms through the Pensions Act 2008. This act requires every employer in the UK to offer a workplace pension plan and also enroll eligible workers into the schemes offered. These reforms are termed as automatic enrollment.

These reforms implemented by the state government recognises that all workers are not eligible to be auto-enrolled into a workplace pension plan and people belonging in other categories such as those who are self employed fail to qualify for auto-enrollment.  Therefore, changes have been made to ensure that provisions are made to enable people belonging to such ineligible categories to join pension schemes and start saving up for their retirement benefits.

These steps for auto-enrollment have been initiated so that eligible workers don’t have to take separate action themselves in order to build up a sizeable retirement pot. Auto enrollment ensures that employers do this automatically and deduct any contributions directly from the wages or salary of their workers and then make contributions into the workplace pension plan on behalf of that worker.

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What Are The Responsibilities Of An Employer With Regards To Auto Enrollment?

As part of the auto-enrollment initiative, each and every employer is required to enroll workers into a work place pension scheme as long as they meet the following criteria:

  • Work in the UK
  • Are not already enrolled into a workplace pension scheme
  • Are 22 years old at the very least, but fall under the state pension scheme
  • Earn in excess of £10,000 each year

Your employer will inform your in writing about how auto-enrollment is going to affect you.  In some cases this might be done through a letter, while some employers might prefer to communicate over email.  The exact time when your employer informs you about the implementation of auto-enrollment depends on the size of business you are employed in.  The larger employers are required to implement auto-enrollment first, followed by the medium and small sized employers.

Most smaller employers are starting their implementation of a workplace pension scheme between 2016 and 2017. The entire process is expected to be complete by 2018. Expect your employer to communicate that they have started enrolling workers automatically around that time. Your employer should let you know about the following:

  • What type of pension you have been enrolled into
  • The precise time when you are being enrolled
  • Who is operating the pension that you are being enrolled into
  • How you can opt out of the workplace pension place, if you so desire
  • The amount of contributions that your employer and you will make into the pension account

If you have been already enrolled into a workplace pension scheme by your employer, expect your employer to inform you that auto-enrollment does not affect you in anyway.

If you are not already enrolled into a workplace pension plan and don’t meet all the eligibility criteria for auto-enrollment, your employer will let you know

  • That you have the right to join the workplace pension plan
  • If your employer will make minimum contributions into your pension amount

What next?

If you are eligible for auto-enrollment, you don’t need to do anything unless you wish to opt out of the workplace pension plan. 

Your employer is required to make minimum contributions into your pension pot. You will also be required to make a minimum contribution, but your payments will be taken out of your monthly salary.

If you find yourself to be ineligible for auto-enrollment, it is up to you to decide the steps you need to take next.

If you still wish to join a workplace pension scheme you will have to inform your employer about the same. They cannot refuse a direct request. Also, if you decide to opt out of the workplace pension scheme, your employer should allow you to do that.

If your employer is automatically enrolling you into a workplace pension scheme, the letter or email you receive should explain how you can opt out of the pension, if you so wish to.

You will have to ask your employer to give you the opt out form and then return the completed form back to them. In some cases you might be able to opt out online or by phone. 

Your employer should inform you about who you should contact, but they are not allowed to handle the opt out process on your behalf.

This is done to ensure that employers do not encourage their workers to opt out of pension plans.

Your employer does not have the option of opting out of his/her auto-enrolment responsibilities. Also, while you retain the freedom of opting out of the workplace pension plan you have been automatically enrolled into, your employer cannot:

  • Encourage, force or threaten you to opt out of the workplace pension plan
  • Target you for not opting out of the workplace pension plan

The above mentioned points also hold true during the recruitment process for prospective employees.

Your employer should not have hinted or suggested in any way that opting out of the workplace pension plan is going to increase your chances of being hired.

If you believe that your employer is not taking the requisite measures to implement auto-enrollment correctly, you can report them to the Pension Regulator. You can also do this anonymously.

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Who Is Responsible For Workplace Pensions?

Auto-enrollment has been initiated and this means that workers belonging in any field such as engineering firms, hairdressers or publicans are now required to be automatically enrolled into a workplace pension plan by their employers.

 Now, as many medium and smaller sized businesses reach closer to their ‘staging date’, there is expected to be a marked change in the entire process.

Staging date is the date by which a company should have an operational work pension plan.

Due to the limited resources that these businesses possess, it is highly unlikely that they can hire in house specialists or external consultants. Instead the more likely scenario is that a high ranking board member such as the managing director or maybe one of the founding members will be tasked with the responsibility of choosing the right payroll provider to handle the company’s auto-enrollment responsibilities.

Its best to not delay the decision any further because there is also the possibility that the payroll provider you have chosen might not have the time required to set up your workplace pension plan. Also, such individuals might not have the sufficient expertise in employee benefits or pensions, which can delay the task even further.  Another concern is of making sure that the payroll provider you have chosen meets your company’s legislative deadlines with regards to auto-enrollment.  If you fail to meet your company’s staging date you face the very real prospect of paying heavy fines.

The first step involves finding out when your company’s staging date is. It is possible for company’s to delay their staging date in some scenarios, the workplace pension plan must be operational by this date, so that workers can start contributing into their pension plan. 

The staging dates are usually staggered and dependent on the number of people on the company’s payroll. If you are not yet aware of your staging date, you can find more details on the Pension Regulator’s website.  You can find out your firm’s staging date by entering your company’s PAYE reference in the online calculator.

Most pension experts have issued a warning to firms to plan in advance. Initial evidence suggests that a company might require six months at the very least to ensure the smooth implementation of workplace pension plan by the staging date.

The way auto-enrollment is being implemented indicates that a greater number of companies are now going to approach their staging dates. For example, there are a number of companies in the UK who have 100 or less employees and these companies will now be nearing their staging dates.

If you own one such firm and are still delaying until the last moment, be warned, there is a very real possibility that your chosen pension provider and payroll provider might not be able to set up your workplace pension scheme in time. The decisions you take now can have a very lasting effect on the well being of your employees as well your business.

It is possible for some firms to hire an independent adviser to deal with their auto-enrollment duties, although any such decision will likely also involve a fee that will have to be paid to the consultant.

Smaller firms can also contact larger more established pension providers to handle their business’s auto enrollment requirements. One key aspect in which your business can benefit from the services of a large provider is that you can be sure that your pension scheme falls in line with all the regulatory guidelines involved.

For example, companies who are overseeing this major switch to auto-enrollment will be required to ensure that overtime and bonus payments are included in the minimum contributions being made. They will also have to make sure that workers who do not automatically qualify for the workplace pension scheme are notified of the same and informed that they still have the option to opt in.

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Can The Implementation Of a Workplace Pension Plan Boost Employee Morale? 

For any business to flourish they need to first be able to attract the right kind of staff and then be able to hold onto staff who are more talented and experienced. This is not always easy to attain, especially in today’s tough economic climate.

A workplace pension plan can go a great way in helping a comparatively smaller business recruit and retain the right kind of talent.  This is not just about the kind of pension, saving or protection package you are offering to your employees, it also hinges on the kind of information and support you are offering about retirement options. These days even smaller businesses retain the ability to offer such packages to their employees thanks to a number of savings products available these days, the resources available for financial education along with a vast online platform.

Various studies have so far outlined the importance of a workplace pension plan as it is valued most by employees. Studies have also rated pension to be above extra holiday or childcare vouchers or even private medical insurance.  
It’s very likely that workplace pension is rated even more highly in the future. Budgetary changes that have been announced also mean that workers now have greater access to their pension pot from the age of 55. Also, they are no longer compelled to purchase an annuity, which many believed offered very poor value.  Thanks to the auto-enrollment initiative being implemented by the government, a vast majority of workers in the UK will now have access to a sizeable sum post retirement because of a company pension.

These changes can also ensure that UK’s workforce become more engaged in saving for retirement.  Auto-enrollment means every employer is legally mandated to offer his or her employees a basic workplace pension scheme. This is also an opportunity for forward thinking companies to offer better packages to their employees instead of just offering the most basic scheme. This helps them to stand out from their competition while at the same time it ensures that they meet all the requirements of their workforce.  Also, it will help them retain their more talented and experienced employees for a longer period of time.

By offering your employees a good workplace pension plan, you show your trust in them and are prepared to make a long term investment for them by not just giving them a good financial package today, but by also providing them with a lump sum payment at retirement age.  

One of the important disparities will mostly involve the amount of money employers are willing to spend on these new pension plans for their employees. 

At the initial phase of auto-enrolment they will be required to make at least a minimum contribution of 1%. But these minimum contribution levels go up gradually. By 2018 employers will be required to contribute 3% while their employees contribute 4% of their annual income into their pension plan. 

Employers who are worried about the costs of auto-enrollment will do well to keep in mind that their contributions are going to be lower than increasing employee salaries as they are not likely to incur employer NICs. Employers can also make additional savings by promoting the idea of salary sacrifice to pay for all the benefits rather than the contributions of their employees.

Workplace pension schemes can also be applicable for the Pension Quality Mark. In order to be able to achieve this, firms need to show that 10% of their employee’s salaries is invested in a workplace pension scheme. Possessing such accreditations shows to your current as well as potential employees that you are interested in investing for the future.

When you are taking a look at various workplace pension plans, make sure that you give adequate consideration to your workforce. Instead of just increasing your percentage contributions into the pension fund you might also want to increase the salary of your employees on which a percentage is put in the pension account. Remember under the guidelines for auto-enrollment these contributions will only have to be made for an annual salary of up to £41,865. If a number of people on your staff are already on high salaries, you might want to consider increasing the pension contributions, so that they accurately reflect that employee’s current salary. On the other hand employers of workers belonging on other end of the salary scale which includes workers with an annual income of £5,772 or lower might want to make contributions into a workplace pension plan on behalf of such low earning workers. This will ensure that they are able to take home a significant amount post retirement despite not having any significant deductions from their comparatively smaller monthly incomes. 

Of course doing such a thing means greater investment on part of companies, but these costs can also be limited if the companies ensure that benefits are staggered. This allows staff to accumulate a greater pension amount in reward for a longer period of service.  You can also find similar arrangements for other packages like holiday pay and by offering your employees such incentives you increases your chances of being able to hold on to them for a longer period of time. Or you can also avail matching pension agreements. Instead of having to make higher percentage contributions into an employee’s pension fund, you can get your staff to be more enthused about saving up for their post retirement life and thereby invest a greater amount themselves rather than just making the minimum contributions which are mandated by the auto-enrollment guidelines.

Now, making greater pension contributions might not be a financially feasible option for a few firms. That does not mean that they can’t do anything about it. Steps can still be taken by such firms to improve the package they are currently offering. One thing you can definitely do if you run such a firm is put in place a high quality default option and then make sure that it is monitored and reviewed on a regular basis.

Check if your pension provider can also help you out with the research of online portals which give access to a wider range of pension offers and also with the administration of the pension plan rather than just providing information about different fund values and assistance on switching investments.

Perhaps the most important step you should take is that of ensuring that your staff is well aware of and completely engaged in the entire process. If your employees are not fully aware and conscious of the potential benefits of the workplace pension plan you have implemented for them, you will find that all the time and effort you have put in to set up the scheme has not brought you much benefit.

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How to Decide On The Right Pension Plan?

As part of the auto-enrolment initiative millions of workers across the country will be automatically enrolled into a company’s active workplace pension plan. Now, as they are being automatically enrolled most of them must have not opted in voluntarily for workplace pension. Also, this means that they do not have a big or important say in choosing where their money is being invested. What this does is place a huge responsibility on the back of all employers to make sure that the pension plan they choose is in line with the needs of their employees.

While this is true for pretty much any company in the country, it becomes particularly critical for many of the smaller firms. It’s very unlikely that such firms possess the financial ability to hire pension specialists to make these important decisions for them.

Every employer must give strong consideration to a number of important factors before they decide on the right pension plan for their employees. Firstly they will have to ensure that the pension plan they choose is financially viable not only for themselves but also for the long term financial health of their business.  On the other hand they have to balance this against the products and added value services they are offering to their employees.

An important consideration can possibly be about the range of products for investment offered. A majority of the existing pension schemes do offer a range of investment possibilities, which includes low risk funds for the more experienced and as a result more cautious workers as well as a number of equity based investment funds for workers investing for a time period of over thirty years.

Initial evidence hints that opt out rates are very low for workplace pension plans, so as an employer you need to budget for a significant number of participants. However, while it is important to offer variety in terms of the investment products you are offering, it is also important to keep in mind that most firms do not hold about 50 funds or more in their portfolio. Too many options can also be cause of a great confusion which will ultimately lead to most employees sticking to the default pension plan.

Therefore, this default option that you choose is going to be very important. Considering that most employees are going to be automatically enrolled into this default plan, the plan you choose should have low fees and also at the same time offer a robust investment strategy with the reliability of a proven track record.

Cost will be a very important factor. Employers need to evaluate the cost of the pension plan not just to the company but also to its employees who will be offered the workplace pension plan. There is a possibility that statutory charge caps are introduced in the later part of the auto-enrollment initiation, right now there is some variation in the pension and investment fees.

As an employer you would not want to find yourself in a situation wherein you are believed to have not taken the needs of your employees into consideration when setting up a cost effective workplace pension plan for your business. Most firms would also most likely look to outsource their pension responsibilities to an external payroll company, as such an option is not only more cost effective and less time consuming, it also means that companies can rely on their expertise in ensuring that the pension scheme is adherent to all auto-enrollment regulations.

It is important to pick a pension provider who possess the required legal expertise and experience to ensure that your scheme is compliant to all the regulations and that your business meets all its auto-enrollment responsibilities. Look to choose pension providers that also offer you additional support such as payroll assistance, technical support and record keeping. But remember if you are choosing such a pension provider you will also have to pay more to avail such extra services.

Decision makers will also need to give consideration to the costs involved for the staff as well the business. Do not make the mistake of assuming that your existing pension provider will be willing or equipped to take in all new members. Some pension providers might be smaller players in their niche preferring to administer a single pension fund that consist of a number of individual members who are contributing relatively small amounts into the fund.

People who are managing this big transition into auto-enrollment also need to confirm what the employer is going to contribute into the workplace pension scheme. Again, it is important to remember that all the evidence suggests to low opt out rates for auto-enrollment. Therefore, it is important that you make the required budget considerations for high participation rates.

Lastly, can a pension provider also assist with employee communications? Why is it important that you consider this? It is important because employees are now going to see a particular amount withdrawn from their salary and transferred into the pension account without them having signed any prior consent form. So it is important to ensure that they are on the same page when you are doing this and therefore a pension provider which also assists in employee communications can be of great help for your business.

Also, it is the responsibility of an employer or a firm to ensure that these changes are explained to their employees in writing either via a letter or email and that too well in advance of it being implemented. The benefits and opt out process should also be clearly explained to all the employees. Initial research suggests that most employees are happy and indeed welcoming of these changes and desiring of greater access to better workplace pension schemes.

This gives employers a greater opportunity to build on this and ensure that the pension plan they choose and the benefits it offers ‘fixes’ most pension concerns that their employees are likely to have.

Employers have the opportunity to build on this, and see that the business benefits from “fixing” workers’ pension concerns.

When do firms have to start with auto-enrollment?

  • Medium sized firms employing between 50-249 workers should start auto-enrollment from April 2014-April 2015.
  • Smaller sized firms employing 49 workers or less should start auto-enrollment from June 2015-April 2017.
  • New firms established after April 2012 should start auto-enrollment from May 2017-February 2018.
  • Larger firms have already started with their auto-enrollment implementation

To find out the exact dates visit the Pension Regulator Website.

How Much Contribution Needs To Be Made Into The Workplace Pension Plan?

Currently the minimum contribution has been set at 2% of your annual earnings, which comprises a 0.8% contribution made by you, 1% by your employer and 0.2 % by the government in form of tax relief.

However, from April 2018 this amount will increase as follows:

  • April 2018 to March 2019: 5% of your annual income which comprises a 2.4% contribution made by you, 2% by your employer and 0.6 % by the government in form of tax relief.
  • After March 2019: 8% of your annual income which comprises a 4% contribution made by you, 3% by your employer and 1 % by the government in form of tax relief.

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Why Auto Enrollment Makes It Even More Important To Outsource Your Payroll

Here are some reasons why auto-enrollment makes outsourcing payroll even more crucial:

Everyone Has To Implement It

No matter how short your staff is, even if you merely employ one worker, you are still obliged to implement auto-enrolment if that worker is deemed to be eligible. It does not matter if you are a small, medium or large sized company, you are legally obligated to comply to auto-enrolment by the time your staging date approaches (which could come sooner then you think!).

One thing we will definitely recommend is that you find out your staging date as soon as possible. All you need to find this out is your PAYE reference.

Punishments Will Be Executed

Just like any legal violation, failure to comply with auto-enrollment can lead to severe punishments. Fines can range from £500 fixed penalty notices to almost £50,000 if companies fail to discharge their auto-enrolment responsibilities or pay the due contributions into the pension scheme.

It’s not just that fines or penalties affect you from a financial standpoint (they do!), but more importantly it affects your company’s reputation with all the negative publicity it causes.  As a company that adheres to all its legal requirements, this can be embarrassing. It can affect the trust factor associated with your brand, which can lead to clients losing trust in you and taking their business to your overjoyed competitors.

Managing A Workplace Pension Plan Is Not Only Complicated But Also Intensely Time Consuming

Even before your staging date approaches, you have a lot to do in terms of getting things set up. This includes finding out eligible candidates in your staff, choosing the right workplace pension for your staff and informing your staff regarding their choices.

One of most important and early decisions you will have to make is concerning the separate pay components, which determines an employees overall qualifying earnings. You have to decide whether each individual component fits perfectly within a particular employee’s qualifying earnings. Preferably give yourself 6-9 months to prepare for your staging date.

Remember even after you complete all the preparations your responsibilities don’t end once your staging date has passed. You have to reassess the eligibility, contributions of your employees, add in opt-ins and remove opt-outs (with refunds given) at the end of each payroll cycle. You also have to keep a clear record of everything and also report it, which is one of the key elements of maintaining a clear transaction trail (this will help you come audit time). As you have probably guessed by know the size of the task is massive and it might be in your best interest to let experienced specialist payroll providers handle it on your behalf. Just remember this, the most common reason given by companies when seeking a postponement of their staging date is that they are overwhelmed by the sheer volume of work involved in setting up auto-enrollment.

Selecting the Right Pension Provider

Pension providers can all seem alike, offering almost the same type of advice for practically the same fee. But when you delve deeper you realise that some pension providers are charging extra in additional administration costs, as there are no restrictions on the charges that can be levied. The pension provider you choose will also affect the overall auto-enrollment costs for your business as well the administration process you will need to implement it. So, make sure that you go through the fine print carefully and check through all the requirements before you sign the agreement.

Other Payroll Responsibilities Need To Be Dealt With A The Same Time

On the one hand your payroll clerk or business manager or accounts clerk etc. is overwhelmed with auto-enrollment related work, but at the same time he/she has to still fulfill their usual salary related responsibilities. As long as they are working, you are required to pay your employees at the end of each month.  On its own payroll management is a full time job as it includes the following:

  • Salary processing
  • SMP, SPP and PAYE payments
  • Production of pay slips
  • In-year and year end reporting

If you factor in additional auto-enrollment related responsibilities, your payroll clerk now has to deal with, you will agree that the workload might turn out to be almost undoable. Also, what if this employee of yours wishes for long-term sick leave? How are you going to manage both your payroll and auto-enrollment responsibilities then? 

These are of course the five main reasons why you should consider outsourcing your company’s payroll and auto-enrollment responsibilities. Other advantages of outsourcing payroll include:

  • Greater risk management
  • Lower operational costs
  • Compliance assurance
  • Value added support
  • Scalability
  • Better cash flow
  • Automatic emergency planning

Dealing with auto-enrolment with the resources you have at hand might stretch an already thin human resources department in your company. That’s why you might better served by dumping all your payment and auto-enrollment related responsibilities on us. Also, remember that if you go looking for a payroll company at the last minute it is bound to cost you much more, so it is better to plan ahead and agree fixed fee contracts with payroll providers, which would lead to reduced overheads. 

Auto Enrollment-The Penallties

The pensions regulator is a UK based regulator in charge of workplace pension schemes. This regulatory body was set up by the Pensions Act of 2004. The regulator is sponsored by the Secretary of State for Work and Pensions and is an executive non-departmental body.  It is based in Brighton and employees about 350 staff.

Lesley Titcomb who is the current Chief Executive of the Pensions Regulator was previously the Chief Operating Office of the FCA (Financial Conduct Authority)

The Pensions Regulator is the UK regulator of work-based pension schemes. It was set up by the Pensions Act 2004. The Regulator is an executive non-departmental public body, sponsored by the Secretary of State for Work and Pensions. Where does this body derive its authority? How can they issue penalties, fines to employers? Do they have the power to prosecute employers who fail to adhere to their auto-enrollment responsibilities?

The Pensions Act of 2008 issued a statutory objective to maximise employer’s adherence to the legislation surrounding auto-enrollment. This gives the regulator authority to implement measures to enforce fines and even initiate criminal proceedings against employers with regards to any offences that violate the Pensions Act 2008, the Pensions Act 2004 and earlier legislation.

The primary aim of the regulator is to prevent the occurrence of problems developing at an early stage of the auto-enrollment implementation. 

The pension regulator states that it will

use our powers flexibly, reasonably and appropriately, with the aim of putting things right and keeping schemes, and employers on the right track for the long term

Now, if the regulator is investigating you or your business, then it is important to remember that it has the inspection authority to enter your premises and obtain documents and/or information.

To give you a better idea and a more useful overall guide about auto-enrollment related punishments, we have compiled all the information you need in a Question and Answer format.      

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How Can You Avoid Being Penalised By The Pensions Regulator? 

Every employer faces the very real possibility of being penalised by the Pensions Regulator if they fail to fulfill all their auto-enrollment related responsibilities under the Pensions Act of 2004 and 2008 along with other regulations. To prevent yourself from being faced with such a consequence you must:

  • Inform your employees about all your auto-enrollment related duties
  • Automatically enroll all workers who fulfill the eligibility criteria for aut-enrollment into a workplace pension scheme.
  • Allow all non-eligible workers into the workplace pension scheme if they want to opt in
  • Provide confirmation in writing to all eligible workers about the fact that they have been enrolled into the company’s workplace pension scheme. You also need to inform them that they are allowed to opt out if they so wish to.
  • Ensure that a worker is removed from the workplace pension scheme if they decide to opt out and that their contributions are refunded.
  • Submit a declaration of compliance to the Pensions Regulator, which includes all the important details about your scheme such as the number of workers that have already been automatically enrolled.
  • Re-enroll any eligible worker automatically every three years, provided that they have not joined any other pension scheme in the interim, thereby renewing their registration.
  • Hold all records pertaining to the auto-enrollment process.

Along with complying with the above mentioned points, you should also not:

  • Encourage or threaten your workers to opt out of the workplace pension plan or cease their membership to the pension scheme they are qualified for.
  • Do something or not do something that directly affects the eligibility of the worker while he/she is still employed to you
  • Hint that a candidate’s decision to opt out of a workplace pension plan has a significant bearing on whether or not that candidate is selected during the interview process

Types of Penalty Notices And Fines:

What Penalties Can you Face?

As already mentioned the Pensions Regulator has a number of powers to investigate any matters or issues concerning auto-enrollment. This includes the power to issue formal notices which requests information from employers or warning for possible breaches, inspection powers or to issue statutory notices to an employer when they have been deemed to fail with their auto-enrollment duties.

Statutory notices issued by the Pensions Regulator can include:

  • Compliance note;
  • Improvement notice or
  • Unpaid contributions notice

The whole point of such notices being issued is to make the employer aware that they are now in default and must remedy the situation immediately or face the prospect of paying heavy fines.

The regulator might charge you interest on any unpaid contributions that they estimate and by doing that recover the unpaid pension contributions on the behalf of scheme trustees and managers.

If you have been issued a statutory notice and you have ignored it or failed to comply with it and there is sufficient evidence that points to a breach of employer’s responsibilities with regards to auto-enrollment, you can be issued a penalty notice by the Regulator.  The different types of penalty notices that you can be issued with include:

  • A fixed penalty notice that will require you to pay a fixed fine of £400
  • An escalating penalty notice which will impose on you a daily penalty in the range of £50 to £10,000 for each day you remain non-compliant to the notice
  • Prohibited Recruitment Conduct Penalty Notice set at a maximum upper limit of £5,000
  • A civil penalty notice, if the employer has not made contributions to the pension fund. The fine for this notice could come to about £5000 for each employee and £50,000 for an organisation.

Now, if you have been issued a notice and a penalty, and have failed to pay your penalty, the regulator possesses the requisite authority to initiate legal action against you to recover the fines. Criminal prosecution can be carried out and if found guilty, any offender can be handed prison time of up to two years.

What Is A Formal Notice?    

It is a letter issued by the Pensions Regulator requesting more information or warning of possible breaches committed by you or your organisation. It is also important to not confuse a formal notice with any of the following:

  • Compliance Notice
  • Improvement Notice
  • Unpaid Contributions Notice
  • Prohibited Recruitment Conduct Notice or
  • Penalty Notice

If issued, the formal notice is the earliest form of action that the regulator might take once it believes that there has been an occurrence of a breach in regulations. If you find yourself on the receiving end of a formal notice issued by the Pensions Regulator, make sure that you provide any/all information requested by the regulator in the notice and also immediately initiate corrective measures to ensure that you and your organisation remain completely adherent to auto-enrolment regulations.

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What is a Compliance Notice, Improvement Notice or Unpaid Contributions Notice?

The Regulator might also to decide to send a more formal letter to the employer such as the compliance notice, improvement notice or an unpaid contributions notice, if it detects a possible breach in compliance.

If you are the recipient of one of these notices, it will be a formal letter issued by the Pensions Regulator, which lets you, know that they believe you are in violation of your responsibilities to ensure auto-enrollment under the Pensions Act. It’s advisable to take corrective measures to keep yourself compliant as soon as possible.

A Compliance Notice will inform you how the regulator believes that you are in violation of your duties with respect to auto-enrollment and it will also provide you a time frame within which you will need to become compliant. Also, the notice will include the correctives measures you need to employ or the steps that you should refrain from taking to be compliant to auto-enrolment regulations stated in the Pensions Act 2008.

Now, if the regulator has concluded that the violation has been caused by a third party and not directly by you, the notice will direct the third party to take the requisite corrective measures needed before a specified date. A third party breach notice does not mean to say that you are in violation of your responsibilities, but it is issued to make you aware about the situation and failure on behalf of the third party you have employed to deal with your company’s auto-enrollment duties.

  An Improvement notice usually follows a Warning notice. This letter will again indicate how the regulator thinks you have violated auto-enrollment norms and specify a time frame within which you will be required to implement all the corrective measures asked of you.

An Unpaid Contributions Notice will be issued by the Pensions Regulator, if you have failed to make your payments towards the pension scheme. This notice will need you to make the payments to redress the missing amount in the pension scheme within a specified time frame. If you have been issued this notice, the regulator might also decide to charge you interest on the estimated missing contribution amount to recover unpaid contributions on behalf of scheme trustees and managers. You will be notified of the same if the regulator decides to go down this route. 

What is a Prohibited Recruitment Conduct Notice?

If you ask any question or make any statement during the interview process for a new employee, which conveys to the interviewee that their chances of landing the job improves if they opt out of auto-enrollment, then it is considered as a violation of the Pensions Act and will result in the issuance of a Prohibited Recruitment Conduct Notice.

This includes any statement made or questions asked in the following stages of the interview process:

  • The application process
  • Requesting information from the applicant
  • Providing information to the applicant
  • Proposing the terms and conditions of the employment

If this notice is issued a fine between £1000 and £5000 might be levied based on the number of workers employed.

Number of EmployeesFixed Penalty(£)
250 and above5000

What Will Happen If You Don’t Comply With A Penalty Notice?

If you fail to comply with a Penalty Notice, you face a criminal prosecution and a prison term of two years.    

You have to take remedial measures as soon as possible once a Penalty Notice has been issued to you and also the pay the fines within the specified time frame to the Pension Regulator. It is possible for you to make your fine payments online through the Regulators secure online payment service.

How To Know If You Have Been Handed A Penalty?    

If you have been served a Penalty Notice by the Pension Regulator, you will have received a letter informing you of a particular amount that you need to pay as a fine.  The easy way to identify if a letter is a Penalty Notice is by checking if a particular fine amount has been specified in it and if a time interval is given to pay the fine or by checking if the letter states that the regulator has imposed another type of penalty.

If you have received a penalty notice you might be able to appeal it. If you have not been on the receiving end of any notice from the pension regulator, you must make sure that your company is compliant with all its auto-enrollment duties by its staging date. If your staging date has already passed and you have not received any notice, it’s important to ensure your compliance as soon as possible, if you are not compliant already.  Once you do that, also ensure that you submit your Declaration Of Compliance to the Regulator. The Declaration Of Compliance consists of certain information that certifies that you have complied with all your auto-enrollment duties to your Regulator.

What Are The Penalties For Ignoring Auto Enrolment?

If you are not compliant by your staging date, don’t pay your minimum contributions into the workplace pension fund, ignore auto enrollment altogether or certain duties associated with it, you risk facing severe penalties from the Pension Regulator. This could include fixed fines of £400, or fines that lie between the range of £5,000 and £50,000, and/or fines in the range of £50 to £10,000 that will have to be paid on a daily basis.

Can You Actually Go To Prison For Ignoring Auto-Enrolment?

Yes, you can especially if you continue to ignore your auto-enrolment responsibilities, such as failing to:

  • Automatically enroll eligible workers
  • Automatically re-enroll eligible employees who have opted out of a work place every three years unless they have joined into another pension scheme.
  • Enroll an employee who does not qualify to be automatically enrolled but has expressed a desire to opt in to the workplace pension plan.

If found guilty you could be sentenced to a two year prison term

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What Happens If You Do Not Pay A Fine To The Pensions Regulator?

If you have been issued a penalty notice and you fail to pay the fine within the specified time frame, the Regulator can go down the legal route to recover the amount of the penalty and also costs of the litigation. Eventually the Regulator might start criminal proceedings against you, if you continue to ignore the penalty notice.

How much escalating penalty can you receive for your non-compliance?

If an escalating penalty is handed out to you its rate will be determined by the number of workers you employ.

Number of EmployeesFixed Penalty(£)
250 and above5000


What Will Happen If You Fail To Make Minimum Contributions Into Your Workplace Pension Scheme?

If you do not make minimum contributions into the workplace pension scheme, you will be issued an Unpaid Contributions Notice from the Pension Regulator. This notice will direct you to pay the amount within a specified a time frame.

The Regulator might also decide to charge you interest on the unpaid contributions when issuing you an Unpaid Contributions Notice. This is done to recover unpaid contributions on behalf of pension scheme trustees and managers. If the Regulator does decide to charge you interest on your unpaid contributions, you will be informed of the same in writing.

In some circumstances, the Regulator might issue you with a civil penalty, which could be up to £5,000 for an individual and up to £50,000 for an organization.

When Will You Be Faced With Criminal Prosecution And/or A Prison Sentence? 

If you are continuously non-compliant it is possible that the Pension Regulator initiates criminal proceedings against you. For example, if you have failed to take any remedial measures to become auto-enrollment compliant or pay the fines within the specified time frame after the Regulator has issued you a penalty notice.

If you have paid your penalties within the time frame and taken steps to become compliant as soon as possible (Something we can easily handle on your behalf), you wont have to worry about criminal proceedings and a prison sentence.

Is It Possible To Delay Auto-Enrollment If You Can’t Afford To Make Regular Payments Now?

If your staging date has not yet passed or if the date was less than six weeks back, you can delay auto-enrollment of your employees into a workplace pension scheme.

How Payroll.co.uk Can Help You With Auto Enrollment?

At payroll.co.uk we believe in making the entire payroll and auto-enrollment process as easy as possible for our clients. We will set up an auto-enrolment scheme on any device in a matter of minutes. Also, we will continually assist you with regards to your auto-enrollment requirements in the following ways:

  • By enabling you to input all your employee data into our payroll software, or on any other easy format.
  • Automatically assessing how many workers in your company are eligible for auto-enrolment and how many are not.
  • Generating letters with your company logo containing detailed information about auto-enrolment, your responsibilities and the pension scheme chosen, so that you can give it to your employees.
  • Handling any opt outs or opt ins into the workplace pension scheme on your behalf or by enabling your employees to manage it themselves using the payroll software.
  • Many other easy to use value added services and features.

Contact us to know more about how you can easily benefit from our state of the art payroll and auto-enrollment software’s.

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