Auto enrolment explained

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Under the new pension auto-enrolment scheme all employers will have to automatically enrol eligible workers into a qualifying pension scheme.

This could be an existing pension scheme or the new National Employment Savings Trust (NEST).

Eligible workers

Workers for whom automatic enrolment will be required are those aged between 22 and the state pension age, are earning over £9,440 in 2013/14 and are not already in a qualifying pension scheme.

Employers also have certain duties to other types of workers who do not meet the criteria for auto-enrolment. These workers may have the right to ‘opt in’ to the scheme.

Qualifying earnings

Earnings include salary, commission, bonuses, overtime, sick pay, and maternity, paternity or adoption pay. Contributions will be payable on earnings between £5,668 and £41,450 for 2013-14. The thresholds will be reviewed by the Government annually.

What is a qualifying scheme?

A qualifying scheme may be a UK scheme or a non-UK scheme. For a UK pension scheme to qualify it must be an occupational or personal pension scheme, be tax registered, and satisfy certain minimum requirements. Further information on the minimum features required are on the pensions regulator’s website.

Employer contributions

All businesses will need to contribute at least three per cent of the qualifying pensionable earnings for eligible jobholders. However, to help employers to adjust, compulsory contributions will be phased in, starting at one per cent before eventually rising to three per cent.

There will also be a total minimum contribution which will need to be paid by employees if the employer does not meet the total minimum contributions.

If the employer only pays the employer’s minimum contribution, employees’ contributions will start at one per cent of their salary, before eventually rising to four per cent. An additional one per cent in the form of tax relief will mean that there is a minimum eight per cent contribution rate.

Timescales

Auto-enrolment is being phased in over a number of years, starting from 2012 for larger employers. Each employer will be allocated a ‘staging date’ from when their duties will begin.

This is based on their size at April 1, 2012 or the letters in their PAYE scheme reference. Employers can check their date at www.thepensionsregulator.gov.uk/staging.

Postponement offers additional flexibility for employers, allowing them to choose to postpone auto-enrolment for up to three months.

NESTs

From the relevant staging date, unless employers are following the company scheme route, they will have to enrol each eligible worker into a NEST. These will be free of charge for employers to use, annual management charge will be set at 0.3 per cent with an initial 1.8 per cent charge on contributions, there will be a limited choice of investment funds and an annual contribution limit will apply.

See www.thepensionregulator.gov.uk for more details.