A workplace pension is a way for employees to regularly save a proportion of their pay towards their retirement. As an employer, it is your responsibility to select a pension scheme that benefits all employees.
But picking the right pension scheme for your business can be tough. The pension scheme must comply with specific requirements, most notably automatic enrolment.
Additional issues include the cost of the pension scheme and whether it functions on payroll software.
To make sure your existing scheme or a new pension scheme fulfils these requirements, while facilitating your needs as a business, here are some things to consider as you make your decision.
Factors to consider when choosing a workplace pension scheme:
Introduced in 2012 by the UK government, auto-enrolment requires UK employers to put all qualifying employees automatically onto a workplace pension so that they can contribute to their pension savings.
Since this legislation was put into place, around 10 million people have been auto-enrolled onto a pension with their employer’s help, saving for their retirement.
The pension scheme you choose for your employees must enable auto-enrolment, otherwise, your business will be fined by The Pensions Regulator.
A pension scheme that has automatic enrolment must meet certain requirements:
- No requirement for employees to do anything to join
- Being tax registered in the UK
- Being an occupation or personal pension scheme
- Require a minimum level of contributions to be paid into the scheme
- Allow employees to choose their own investments
These are just a few of the requirements you would need to consider as you choose the right pension scheme that works for your employees.
The Pensions Regulator has a comprehensive guide on qualifying schemes and automatic enrolment if you would like to learn more about what requirements need to be met.
Another factor that plays a big part in choosing a workplace pension is what tax relief employees receive when they pay into their pension.
There are two ways for employees to gain tax relief through a workplace pension scheme:
- Relief at source – the pension provider has to claim tax relief from HMRC. Providers who offer this service include National Employment Savings Trust (NEST) and True Potential Investments.
- Net pay arrangements – the business needs to calculate tax on the pay leftover after being paid into the pension. Providers who offer this service include NOW: Pensions and The Lewis Workplace Pension Trust.
Providers that offer relief at source and net pay arrangements are The People’s Pension and Standard Life Workplace Pension.
The type of tax relief that you choose is highly dependent on whether your employees pay income tax.
For employees that don’t pay income tax:
They will only get tax relief with a scheme that offers relief at source.
Employees will not receive tax relief with net pay arrangements and will end up paying 20% more for their pension as a result.
If your business uses salary sacrifice to manage pension contributions, then employees won’t get tax relief for either of these tax relief methods.
For employees that do pay income tax:
They will get tax relief for relief at source and net pay arrangements schemes. But if higher and additional rate taxpayers are using relief at source, they have to claim their full tax relief by completing a tax self-assessment.
Both methods of tax relief have their own benefits, such as lower member charges for net pay arrangements, and drawbacks, especially for employees that don’t pay income tax.
As a scheme uses one method for all staff, this will affect lower and higher-paid staff in different ways. This is why it is essential to choose a pension scheme that works with all types of employees at your business.
Cost and charges
While pension providers charge businesses in different ways, the most common include an ongoing monthly charge or a single up-front charge for the pension scheme.
For employees enrolled on a pension scheme, charges are issued to cover the cost of managing their savings. Certain schemes charge employees differently, such as lower charges for low paid employees. Depending on the type of tax relief being used on a scheme, these employees can pay less for their pension.
Take time to find a workplace pension scheme that provides a good level of services at a reasonable price.
A cheaper option might be tempting but will offer limited options. If you want more support from your provider, helping employees get to grips with the pension scheme, then it will cost a little more.
It’s worth bearing in mind that for employers changing pension schemes, there may be an exit fee that must be paid.
Clear information and support
Pension providers may offer additional services that help your business keep track of each employee’s pension scheme.
One of these services involves sending regular communications to your business and employees. Annual statements can help employees monitor the progress they’re making towards their retirement.
If your pension provider is unable to offer this service, then it is your responsibility to send an email to employees detailing:
- The date they’ve been added to the pension scheme
- The type of pension scheme they’re enrolled in and who the pension provider is
- How much they will pay and how much you will contribute
- How employees can leave the scheme if they wish to do so
With the auto-enrolment requirement for workplace pensions, it is essential to let employees know that they have the choice to remain enrolled or opt out.
As you come closer to a decision, you need to clarify whether your chosen pension scheme will work with your payroll provider, as the payroll software must carry out all the auto-enrolment tasks.
Like we mentioned earlier, some pension schemes might offer to explain to employees how auto-enrolment applies to them and how tax relief works. If not, your payroll provider may offer to do this service for your business.
It is important to make sure the pension scheme you choose offer investment options, such as ethical funds, that fit the needs of employees.
For employees that don’t choose their own investments, your pension scheme must include default investment arrangements. This arrangement, which is charged to an employee’s savings, must be no higher than 0.75% a year of their fund.
Finding a pension scheme that best suits your employees’ needs, given by a provider that is dependable and responsive, can save you a lot of time and stress in the long term.
It is up to you as an employer to meet obligations related to the pension scheme, such as paying contributions on time. Don’t forget to monitor and review your chosen pension scheme to make sure the service provides good returns for employees working at your business.
As tax regulations and legislation govern pension schemes, it may be worth consulting an independent financial advisor before making your final decision.
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Setting up a pension scheme for your workplace? Speak to our team of experts at Count for additional guidance on workplace pensions!