Pensions: the rules are changing

A massive overhaul of workplace pensions is set to start this year, with the objective of encouraging the many millions of workers who are currently not contributing to pension scheme to do so.

All small business will be opted into the scheme

Companies are being automatically enrolled in the scheme at a date which is essentially determined by the number of employees in the business. The largest employers have already been brought into the scheme and it is expected that the majority of small businesses (employing fewer than 30 employees) will most likely need to join at some point in 2015.

Once enrolled, companies will have to contribute a minimum of 1% of the employees' gross salary, rising to 3% by 2018. Employees will ultimately contribute up to 5% of their gross pay, but will get tax relief on this amount, so the total annual pension contribution will be ultimately become 8% of the employees' gross earnings whilst costing most employees only 3 or 4% of their earnings.

Employees will be "auto-enrolled" at the same time as their companies are added to the scheme. So this means any employees (or workers) aged 22 or over and with earnings of at least £8,105 per annum (and not currently paying into a pension) will be brought into the scheme.

Where do the pension funds actually go?

The funds collected will be invested by default in the National Employment Savings Trust (NEST) pensions scheme, which invests across a range of the usual asset classes (including cash, stocks and shares). And unlike National Insurance contributions, these pension contributions will be designated to the employee individually, so the more the employee puts in the more he or she gets out (subject of course to the investment performance of the pension fund).

It will be possible for employees to opt-out, but given the highly subsidised nature of the contributions, uptake is expected to be high.

We've recently helped several of our clients prepare for auto-enrollment, so please don't hesitate to get in touch if you need any help getting it up and running. If you haven't had a quote from an accountant recently, why not drop in to our London head office or try our Instant Accounting Quote?