New Workplace Pension Reforms (Auto-Enrolment)

From 2012 new legislation will require all employers to manage the pension saving of their work-force. This affects bigger employers first, then all employers by 2017 – even those with just one employee. It will apply to all employed persons but not affect the self-employed. The intention is to boost people’s retirement savings, but it means more cost and red tape for employers (and fines for getting it wrong).

Essentially, everyone will make pension contributions 8% of their qualifying earnings, of which employers contribute a minimum of 3%.  Qualifying earnings are between £5,715 and £33,540 (exact range isn’t yet confirmed).  Employees will be “auto-enrolled” into a pension, but can opt out if they wish (any “opt-outs” will be re-enrolled every 3 years). Where an employer already has a pension scheme they can continue to use it so long as it meets certain criteria (including the minimum contributions levels). There will be a default option called the National Employment Savings Trust (NEST) for employers who don’t have a qualifying scheme in place.

Employers without a pension scheme can choose to set up their own qualifying arrangement using a pension adviser, or use NEST. The advantages of using your own scheme are that it can be set up tax efficiently using salary exchange, and employers can outsource the auto-enrolment and the monthly calculations. Smaller employers may be forced to use NEST as pension companies do not always offer schemes to those with 5 or less employees. Despite the extra burden on employers, most people don’t save enough for retirement so anything that encourages people to build up their own assets is a step in the right direction.

Disclaimer: This article is for general information only. Do not act on its contents without seeking professional advice tailored to your particular circumstances. Heritable Financial Planning is a trading style of Johnston Financial Services Ltd, 49 Northumberland Street, Edinburgh, EH3 6JQ which is authorised and regulated by the Financial Services Authority.