Employers must set up pension schemes

David Hill INLT 45-099-PSB
David Hill INLT 45-099-PSB

If you haven’t already heard from your employer about the new pension changes, the chances are that you will do very soon.

According to the Pensions Regulator, this financial year 32,000 employers will reach their staging date. The staging date is the deadline where employers must, by law, have set up a qualifying workplace pension or face fines of up to £10,000 per day for deliberate non-compliance.

In the following financial year, it is forecasted that 152,000 small and micro employers with fewer than 50 employees will reach their staging date. While the pensions regulator is encouraging employers to take 18 months to prepare for the new rules, we have seen a big increase in enquiries from employers who have left preparations to the last minute, unaware of what is involved in setting up a qualifying scheme.

When you receive the communication from your employer that you are to be automatically enrolled into a pension scheme, it is very likely to be in your best interests. There are very few circumstances where it is wise to opt out of a work-based pension scheme. This is because your employer will be contributing to your pension and the Government will also be adding at least 25 per cent on top of your own contribution, by way of tax relief.

By October 2017, employers will be required to increase their contributions to a minimum of three per cent of what is known as “qualifying earnings”. Qualifying earnings are what you earn between £5,772 and £41,868 per annum.

If, however, you are earning less than £10,000 per annum, then your employer may choose not to automatically enrol you in a pension scheme. Other employees who may not necessarily be automatically enrolled are those below the age of 22 and those over state pension age.

The Government is very keen on employees making some provision for their own retirement and they have made it a little difficult to opt out. Employers must opt in to their scheme all those who are eligible and must contribute.

Employers can not directly provide employees with forms to opt out, or they will be fined. And those employees who do decide to opt out will be automatically enrolled back in by their employer three years later.

So if you do hear from your employer about a new pension scheme in the coming months, it is very unlikely to be in your interests to opt out.

David Hill is a Chartered Financial Planner and Independent Financial Adviser at Hills Financial Planning, 15 Agnew Street, Larne. He can be contacted on 028 28276814 or by email: david@hillsfinancialplanning.co.uk