Most small business owners know that they have obligations in terms of pensions for their staff under the auto-enrolment system, however for new employers or those who didn’t previously have staff who were entitled to be automatically enrolled into a scheme, it can be confusing.
We’ve rounded up five commonly-asked questions about workplace pensions for those involved in running a small business.
What are the legal requirements when it comes to pensions?
Under the Pensions Act 2008, every single employer, even with only one member of staff, has obligations when it comes to retirement provision for employees.
Staff who meet the qualifying requirements must be automatically enrolled into a pension scheme unless they opt out, and you have an ongoing duty to monitor your workforce so that you can enrol staff members who become eligible, and to re-enrol staff who have left at the relevant interval.
What kind of pension schemes are there?
There are two main types of workplace pension – defined contribution schemes (can be known as money purchase schemes), where the pension paid out on retirement depends on a variety of factors including contributions made, and the performance of the investments made by the scheme, as well as fees and charges, and defined benefit schemes (such as final salary schemes) where the pension you staff receive is guaranteed by the employer regardless of external factors.
Most new and small employers opt for a defined contribution scheme. You can choose a scheme yourself, or you can ask a financial adviser or other specialist provider to help you select the most appropriate one for your business. There is also the government-provided option, NEST, which is straightforward and suitable for many small businesses.
How do I know who to automatically enrol?
You must enrol any staff who are between the age of 22 and State Pension Age, and who earn at least £10,000 a year. Seasonal and temporary staff are included, however as their pay may vary, you must assess it whenever you pay them to see whether they meet the criteria.
You can postpone auto-enrolment for staff for up to three months, and many employers do this for new staff during the probationary period, or for staff whom they know will be working for them for less than three months.
How much does it cost?
With effect from April 2019 the minimum total contributions for each enrolled employee is 8% of salary, of which at least 3% must be met by the employer. You must include things like commission and bonus payments, family leave pay and sick pay in your calculations when working out how much to contribute.
You may also have fees either as a one-off or on an ongoing basis from providers helping you with your pension requirements, either setting up or administering the scheme or the payroll implications.
What happens if I don’t comply with my legal obligations?
The Pensions Regulator is responsible for ensuring compliance, so if you fail to meet one or more of your legal obligations under pensions auto-enrolment, you may face enforcement action, which could mean compliance notice, warnings, a fixed penalty or an escalating fine. Initially you would usually be required to put right the error, backdate any missing contributions and ensure staff are fully aware of what’s happened.
However if you don’t comply after being told to do so by the Pensions Regulator, the situation may escalate to financial penalties, or ultimately, a criminal prosecution.
If you’re concerned about pension requirements for your staff, or would like help with finding a suitable financial adviser or writing letters to employees, do get in touch.