Get ready for changes to workplace pensions in April 2018

Auto Enrolment special from THP

By now, almost every UK employer has been legally obliged to automatically enrol their employees in a workplace pension scheme.

Indeed, the only firms that haven’t yet had to do so are those who became new employers between July and September 2017. If that’s you, you need to act fast – you must have an auto enrolment scheme in place by 1 February this year.

All other employers should currently be offering a scheme into which they contribute a minimum 1% of qualifying earnings, to match a minimum contribution of 1% made by each employee. If an employer pays in more, then the member of staff only has to make up any shortfall. For example, if the employer pays in 1.5%, the employee only needs to contribute 0.5% (although they are free to pay in as much as they wish).

On the face of it, a total 2% contribution isn’t exactly huge – and in most cases is unlikely to add up to a comfortable pension further down the line. There’s a reason for this – the amounts were set low in order to ease both employers and employees into making contributions under the new rules.

Upcoming rises in contributions

From the outset, the minimum contributions were always planned to rise. The first mandatory increase comes into force on 6 April 2018, when the total minimum contribution will be upped to 5%, of which employers must stump up at least 2%. There will be a similar rise on 6 April 2019, when the total minimum contribution rises to 8%, with employers putting at least 3% into the pot.

So, at a glance, these are the contributions you’ll need to make.

Date effective Employer minimum contribution Staff contribution Total minimum contribution
Currently until 5 April 2018 1% 1% 2%
6 April 2018 to 5 April 2019 2% 3% 5%
6 April 2019 onwards 3% 5% 8%

So far, so clear. Auto enrolment is about to cost you more, whether you are an employer or an employee. But as always, things are never quite as simple as you’d hope.

Self-certified schemes

If your business currently offers employees a Defined Contribution (DC) or a Defined Benefit (DB) pension scheme, you may have self-certified that your scheme meets minimum requirements for automatic enrolment. To continue to do this, your scheme must meet the standards of one of the following three sets from 6 April 2018.

Set 1. A total contribution of at least 6% of pensionable pay, of which the employer contributes 3%.

Date effective Employer minimum contribution Staff contribution Total minimum contribution
Currently until 5 April 2018 2% 1% 3%
6 April 2018 to 5 April 2019 3% 3% 6%
6 April 2019 onwards 4% 5% 9%

Set 2. A total contribution of at least 5% of pensionable pay, provided that pensionable pay constitutes at least 85% of earnings. The employer needs to pay a minimum of 2%.

Date effective Employer minimum contribution Staff contribution Total minimum contribution
Currently until 5 April 2018 1% 1% 2%
6 April 2018 to 5 April 2019 2% 3% 5%
6 April 2019 onwards 3% 5% 8%

Set 3. A total contribution of 5%, with an employer minimum of 2%, provided that all earnings are pensionable.

Date effective Employer minimum contribution Staff contribution Total minimum contribution
Currently until 5 April 2018 1% 1% 2%
6 April 2018 to 5 April 2019 2% 3% 5%
6 April 2019 onwards 3% 4% 7%

If your scheme doesn’t meet one of these standards, it will not qualify for auto enrolment, putting you at risk of fines and penalties. Contribution amounts will also need to rise again in April 2019, so it’s wise to make sure you scheme will comply well in advance of this date.

What next?

If your workplace pension scheme will meet the requirements of the upcoming changes in April, then you don’t need to act (though it’s always a good idea to review your pension schemes periodically). If you are unsure whether your scheme will comply, contact us here at THP, with offices in WansteadCheamSaffron WaldenChelmsford, and London City. – if it isn’t, you could face fines in the range of £50 to £10,000 for each day you don’t comply with the rules.

And if you ask me, that’s money that would be better spent on your own pension pot!

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