In 2012, the government introduced a new regime for workplace pensions. Prior to this, there was no requirement for an employer to contribute to their staff’s pension scheme, although they were required to provide access to a pension.
Since 2018, all businesses in the UK are subject to the rules, as all eligible employees must be automatically enrolled in a pension scheme. The employer is required by law to contribute if the employee meets certain criteria.
Employees have the option to opt out, however they must be re-enrolled every three years.
Eligibility
All ‘eligible jobholders’ must be automatically enrolled in a workplace pension scheme. Eligible jobholders are defined as follows
- Aged between 22 and State Pension Age
- Earning over the earnings threshold (£10,000 per year, although this is pro-rated each month, so anyone earning over £834 in a given month may meet the criteria),/li>
- Ordinarily work in the UK and have a contract of employment
Non eligible jobholders are not automatically enrolled, but can join the scheme. Employer contributions must also be paid if they meet the following criteria:
- Aged between 16 and 74
- Earn above the lower earnings amount (£6,136 for 2019/2020, although this is pro-rated each month, so anyone earning over £512 in a given month may meet the criteria)
- Ordinarily work in the UK and have a contract of employment
Employees who do not qualify on the above basis still have the right to join a workplace pension scheme, although the employer does not need to contribute. The scheme does not need to be the same as the main workplace pension.
Earnings
Your contributions are based on your earnings although the calculation basis will be determined by your employer. Contributions may be based on:
- Qualifying earnings – your salary between £6,136 and £50,000 (2019/2020)
- Pensionable pay – this may be based on your basic salary, and can exclude overtime, commissions and bonuses.
Full earnings
Minimum Contributions
The minimum contribution is 8% of your qualifying earnings. This is made up as follows:
- 3% paid by your employer
- 4% paid by you. This will be deducted directly from your salary
- 1% in tax relief. This is paid by the government, and is credited directly to your pension.
Examples
Sally earns £9,000 per year. She is not automatically enrolled, but can join her workplace pension if she wishes. The minimum contribution will be:
- £85.92 paid by her employer
- £114.56 paid by Sally
- £28.64 in tax relief
- £229.12 in total
David earns £30,000 per year and is automatically enrolled. The minimum contribution will be:
- £715.92 paid by his employer
- £954.56 paid by David
- £238.64 in tax relief
- £1,909.12 in total
Sarah earns £60,000 per year and is automatically enrolled. The minimum contribution will be:
- £1315.92 paid by her employer
- £1,754.56 paid by Sarah
- £438.64 in tax relief
- £3,509.12 in total
As Sarah is a higher rate taxpayer, she will receive further tax relief, either via Self Assessment or directly through payroll. The method will depend on the type of scheme.
Pension Scheme
Employers can choose any workplace pension in the market, providing it can meet the minimum contribution criteria.
An employer may use more than one pension scheme for different categories of employee.
Charges
Like any pension scheme, a workplace pension incurs costs. These may include:
- Ongoing costs – An annual management charge deducted from the pension fund.
- Initial costs – Some pension schemes deduct a small percentage from every contribution.
- Employer fees – These are paid by the employer and are not reflected in the pension fund value.
Changing Employers
Your pension does not automatically move when you change employers. Over the course of a working life it is possible to accumulate several pensions from multiple different employers. You may wish to consolidate these to make retirement planning easier.
As the pension is owned by you personally, you are not impacted by the solvency of any former employers. If a company goes out of business, the pension funds are ring-fenced.
If you have more than one employer at a given time, you may be automatically enrolled by both. However the minimum contributions may be less than if you earned the same salary with a single employer.
Retirement Options
The options available at retirement will depend on the scheme and the legislation at the time. The current position is:
- You can take your pension benefits at any time from age 55
- You will be entitled to take 25% of your pension fund as a tax free lump sum
- The remaining 75% provides a taxable pension income. This can take the form of
- An annuity – a regular, guaranteed income for life
- Drawdown – your pension remains invested and you take withdrawals directly from the fund
- Alternatively, you can draw your pension as a lump sum, of which 25% is tax-free and 75% is taxed at your marginal rate. This can be taken as a single payment or phased over a number of years.
If your chosen retirement option is not available from your workplace scheme, it is usually possible to transfer into an alternative plan.
This guide is created for information only, and does not constitute financial advice. Please do not hesitate to contact a member of the team if you would like some help in planning your retirement.
Contact us today on 020 8366 4400 or enquiries@cedarhfs.co.uk.