Workplace pensions are mandatory for UK employers that employ at least one person. Also known as auto-enrolment, there are certain legal obligations you need to meet, from minimum contributions to sign-up timeframes and more.
This article will tell you all you need to know about setting up a workplace pension, as well as advice on how to provide the best for your team with employee benefits.
What is a UK workplace pension?
A UK workplace pension is a mandatory scheme to help employees earn more money for retirement. When they hit pension age, they’ll be able to claim a State Pension (if eligible) at the same time as their workplace pension.
Who’s eligible for a workplace pension?
As part of the auto-enrolment scheme in the UK, employers contribute to an employee’s pension pot if they’re between 22 and the UK pension age, earn at least £10,000 a year, and usually work in the UK.
Those who earn between £6,240 and £10,00 don’t qualify for auto-enrolment, but can voluntarily enrol on a scheme with the company they work for. These are known as type 2 employees.
Entitled workers earn less than £6,240 and, as a result, aren’t required to enrol on a scheme. As an employer, you also aren’t required to pay any contributions.
How much do employers need to contribute to workplace pensions?
The minimum contribution for employers is 3% of an employee’s salary, with the minimum amount for the employee being 5%. This means that in total, 8% is contributed to a workplace pension fund for eligible staff members.
The total retirement income will also only apply to “qualifying earnings” of your employees. This can include wages, statutory sick, maternity, paternity, or adoption pay, bonuses, overtime, and more.
Find out what’s considered as “qualifying earnings” here.
What types of workplace pensions are available?
There are two workplace pension schemes available in the UK. The first is known as a “defined contribution pension”, and the second, a “defined benefit pension”.
A defined contribution pension is based on the contributions made into a pension pot by the employer and employee, whereas a defined benefit plan offers distinct benefits every year after retirement.
Defined contribution pensions are much more commonplace, and both the employer and employee pay a percentage of the employee’s salary into the fund on a monthly basis.
Contributions are invested into a pension fund that can increase or decrease over time, with the investment performance dictating the final pension amount.
Investment performance is irrelevant when it comes to defined benefit pensions, and an employee’s final salary or average salary over their career is the key factor.
That’s why they’re often referred to as “final salary pensions”.
A step-by-step guide to set up a workplace pension
- Figure out a start date – The start date, or “staging start date”, is the first day of work for your employee. This acts as the first day of the auto-enrolment process and must be established within six weeks to avoid punitive action by The Pensions Regulator.
- Choose your pension scheme, as detailed earlier in the article – Consider what type of employee you’re signing up for a workplace pension, their eligibility, and the kind of pension you’d like to implement.
- Let your staff know – Tell individual employees their situation regarding pension enrolment and provide any information they need.
- Complete an online declaration of compliance – You’ll receive a letter code and PAYE reference by The Pensions Regulator, which you should use to complete your declaration. You also need to re-declare compliance within five months of the third anniversary of auto-enrolment.
Get in touch
At Cedar House Financial, we’re experts in auto-enrolment and can simplify the process for your business.
As well as information and guidance regarding workplace pensions, we also advise on employee benefits that could lead to better staff retention and a more productive workforce.
Get in touch to discuss your options regarding workplace pensions and employee benefits.