Most employers are aware of Auto Enrolment and what it basically involves, but how many are keeping workplace pension scheme information for the legally required six years? If you're failing to retain adequate records you could end up with a fine from the Regulator, and you don't want that.
Why is record-keeping so important? Well, failure to stay on top of this (and being aware of auto enrolment rules) is without a doubt the prime reason why employers neglect to pay the correct contributions to their company pension scheme. That can lead to all sort of problems later on. It can also mean that key dates (e.g. Auto Enrolment Staging Dates) are missed, which is something all employers should take pains to avoid.
You may be targeted for review
Incorrect or out-of-date information is the main cause of payment failure and disputes between an employer and their scheme provider or trustees. Be sure to retain records about pension scheme contributions for the aforementioned required time period. It's actually in your interests to do so, to keep everything on track and, importantly, to avoid disputes that can prove costly (not to mention time-consuming!).
Having all your paperwork in order, with full and meticulously kept records, can give you peace of mind – if for some reason your business is targeted for review by The Pensions Regulator, you can easily provide the necessary evidence that all the correct contributions have been made and at the required times, and you can take pride in doing so.
Auto Enrolment – a quick overview for the uninitiated
The UK Government is keen to ensure that workers don't find themselves in a 'pension shortfall' situation upon retirement. The State Pension these days doesn't go very far and the age people can claim for it is set to rise time and again. This makes it essential that retirees also have a second pension in place. This can be a private pension and/or a workplace pension that will boost their retirement income, allowing them the flexibility to retire earlier than state pension age or perhaps a combination of both.
Whereas, in the past, opting into a workplace pension was often the employee's choice, now it's automatic (subject to certain criteria). By 2018, all employers will have passed their staging date and be required to automatically enrol their eligible staff members into a company pension scheme. A small percentage of their wage is deducted at source and put into the scheme, and the employer must also make a regular contribution.
Note: The government also makes a contribution, in the form of tax relief.
The key info you need on minimum contribution increases
There are more than one contribution structures that can be selected by an employer, one of the first decisions a business should take is to decide which one suits them best. One of these options is Qualifying Earnings (QE), a band of earnings on which pension contributions can be based, in effect this ‘top and tails’ employer liability because they won’t contribute anything based on the first £5,824 of annual earnings or on any earnings over £43,000.
If QE is selected, workers need to make a total minimum contribution of 2% of their banded earnings to their Auto Enrolled workplace pension scheme. But they don't need to pay the whole amount. Each time an employee contributes 0.8%, this is 'topped up' to 2% by a 1% contribution from their employer and 0.2% in tax relief from the Government (totalling 2% in all).
However, this is set to change soon. April 2018 may seem some time away for most of us, but it'll soon by here. By then, Auto Enrolment contributions using QE will increase like this:
- April 2018 to March 2019: 5% of earnings (2.4% from employee, 2% from employer, and 0.6% as tax relief)
- From April 2019 onwards: 8% of earnings (4% from employee, 3% from employer, and 1% as tax relief)
Higher and Additional rate taxpayers will be able to benefit with further tax relief either through self-assessment or if the payment is made by way of Salary Sacrifice (also referred to as Salary Exchange).
A note to employees....
If you're an employee reading those figures and considering opting out of Auto Enrolment, you can legally do so. The process for doing this will be communicated to you once you have been auto enrolled so it will be important to read carefully any information you receive. Do think seriously before opting out, though. It might be wiser to stay in the scheme: having a boosted pension to look forward to upon retirement.
About possible changes to workplace pension rules
Whilst Auto Enrolment is something that most employers and employees are keen to do, business owners have, up to now, found the regime complex and time-consuming. "The rules need to be simplified" is the overwhelming feedback coming from Industry.
The good news is that the Department for Work and Pensions is listening to this, and taking steps to simplify the system by taking action. A number of proposals are in place, meaning that employers and employees can look forward to soon finding Auto Enrolment set up, management and record-keeping far easier.