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How To Set Up A Workplace Pensions Scheme

workplace pensions

All UK employees aged between 22 and the UK state pension age (which is currently 66-68 depending on when you were born) are eligible for the scheme if they earn £10,000 or more.

If you’re an employer who needs to set up a workplace pension scheme, follow these simple steps:

  • Choose a pension provider to manage your contributions. The prover will need to offer workplace pensions schemes.
  • Work out the specifics of your scheme. This includes how much you as the employer will input and how much employees will input from their salary, and which investment options will be used.
  • Talk to your staff about the scheme you have chosen and let them know who is eligible for automatic enrolment. To be eligible they must be between 22 and state pension age and earn >£10,000 a year in the UK.
  • Set up your payroll system to work with the pension scheme contributions.
  • Register your business with the pensions regulator so they know you’re compliant with your auto-enrolment obligations
  • Start using your pension scheme and deduct employee contributions from their pay.
  • Keep all records securely so you can track all pension relation transactions easily. This includes opt-ins, opt-outs and contributions.
  • You should then have a rolling maintenance that re-enrols eligible staff every three years unless they opt out again.
  • New businesses would be advised to seek help from a pensions specialist when choosing their employer pension scheme.

Workplace pensions were changed to auto-enrolment in 2012 meaning that all qualifying employees would be automatically added to their employers pension scheme. The scheme introduced by the government is a way to ensure that workers have some form of pension pot set up for retirement and it is a legal requirement for all employers to pay at least 3% of their workers salaries into a pension scheme.

Read on to learn more about setting up a workplace pension scheme.

What is a Workplace Pension Scheme?

A workplace pension scheme is a savings plan that employers are required to set up and enrol eligible staff into. The money saved is invested and built up until at least state pension retirement age, it cannot be withdrawn before then. The idea is to help workers save for retirement. Both the employer and the employee contribute set amounts each month that will earn interest and be invested over time.

Employers are legally required to offer a workplace pension and pay 3% of each employee’s salary into it each month. This is the minimum contribution required, but employers can choose to pay higher percentages if they wish.

The National Employment Savings Trust (NEST) has been set up by the government and is an option for employers who don’t have their own scheme. This government backed scheme is usually a good choice for small businesses who want to offer their employees a scheme but don’t have the funds to set up or pay into one themselves.

Why are Workplace Pension Schemes so Important?

Workplace pensions are important because they help employees to save sustainably for their retirement years and here’s why that is important;

  • Without the auto-enrol and mandated contributions, there is a risk that many people would fail to save any money for their later years. This can put huge stress on the welfare system and lead to a living crisis in years to come if people are unable to afford to live once they stop working.
  • Contributions from workplace pensions are made pre-tax income which means employees save valuable money.
  • Managed by trustees, the schemes have expert managers who are in charge of investing the pension funds wisely with the best chance of growing them over time.
  • Employers must contribute at least the minimum amounts, which helps to ensure that employees have a healthy retirement fund.

Employers can use their pension contributions as a perk that attracts top talent – particularly if they pay above and beyond the minimum contribution rate of 3%.

How to Choose a Pension Provider

Choosing a pension provider is an important task to get right, and just like any other business decision managers should assess the market and balance available products with their needs. The main differentiators between providers will be how much they charge to set up the fund on your behalf and if there are on-going fees for the life of the plan.

There is plenty of information available on the UK government’s website. Here you can learn in detail about the steps you need to follow when setting up a workplace pension.  The Money and Pensions Service is also a useful website to direct your staff to.

Which are the Most Common Types of Workplace Pension Schemes?

Employers will be able to choose between defined contribution and defined benefit for their pension scheme and the difference between the two affects how the pension is calculated.

Defined contribution schemes 

The amount of money received in retirement for this scheme will depend on how much has been added to the pension pot and how it has been invested. This means that the total fund available will go up and down – so it can be a risky option.

Defined benefit schemes

The amount of money received in retirement under this option is based on a set formula that uses your salary and length of employment to work out how much will be paid. As these are more expensive schemes to run for employees, they tend to be less popular than the defined contribution schemes.

How to Auto-Enrol Employees

Auto-enrolment employees should be a set part of your new staff on-boarding process. Once you have confirmed which pension scheme you will be using, your pension provider will advise you how to add new employees to the scheme when they join you.

Most employers choose to wait until employment probation periods have been passed but at the point of adding new employees, you will need to submit their personal details including name/address/age/salary. You will then need to set up payroll deductions for them and open an account with the pension provider. This will enable them to have a login where they can check the status of their pension with the fund manager.

The Pensions Regulator can also give you advice about how to auto-enrol your employees. They also have a wealth of free resources that can help you to make sure you are compliant with the law and avoid any fines.

How to Notify Employees About Your Pension Scheme

When you have set up your workplace pension scheme, it’s time to let your employees know about it and what they can expect.

You should do this in writing and it may be beneficial to follow up with a face to face team meeting too but this isn’t mandatory.

Regardless of how you share this information, you MUST share the following as a minimum:

  • The name of the pension scheme
  • The provider’s contact details
  • How to set up contributions (both you and your employees can contribute)
  • When contributions will start and stop (usually they will continue until the employee leaves employment or reaches retirement age)
  • That the employee can opt out if they want to.

Employers should take care to share this in a way that is accessible to all employees so that they can make an informed decision as to whether they want to stay in the scheme or opt out.

What if Your Employees Decide to Opt Out?

Whilst it’s mandatory for employers to enrol their eligible employees into a workplace pension scheme, employees have the final say as to whether they want to be in it or not.

‘Opting out’ refers to when an employee fills out a declaration stating that they want to leave the auto-enrolled pension scheme. They can choose to opt back in at any time if they want to.

Your role in this process as the employer is to ensure all employees are aware of their options and to complete any administration required with your pension scheme provider when people want to join or opt out.

If you don’t let employees know that they can opt out, they may be able to take legal action against you.

What’s the Difference Between A State Pension and A Workplace Pension?

Having enough money to see you through your retirement years is an important consideration for everyone. Most people use pensions as a way to save for retirement either through a workplace pension scheme or a private pension. People can hold multiple pension pots with different providers, but most people in the UK can also expect to receive a state pension when they retire.

The State Pension

The state pension is issued by the Government and is funded through National Insurance contributions that workers pay from their salaries during their working lives. To be eligible for the state pension, workers must have reached the required number of qualifying years of contributions. In 2023/24, the current full state pension is £185.15 per week.

Workplace Pension

Workplace pensions are provided by employers and are funded by employer and employee contributions. Employers are legally required to provide a pension and enrol eligible employees as well as contributing a set amount of their salary each month. Unlike the state pension, the amount of money someone will get from their workplace pension in retirement is entirely dependant on how much they have put into it, how the

The key differences between the two types of pension here are that:

  • workplace pensions are offered in addition to the State Pension
  • Private pension providers manage workplace pensions but the government manages the state pension.
  • Workplace pensions have more flexibility over contributions and investment options
  • State pension offers a basic income for retirement whereas workplace pensions have the opportunity to provide much more income in retirement based on the level of contributions made over the lifetime of the scheme.

 

How Do You Set Up Employer and Employee Contributions?

On the face of it, setting up employer and employee contributions for each staff member that is enrolled in the workplace pension scheme sounds daunting, but it doesn’t have to be.

As the administrator for your employer pension scheme, you will be able to link the pension provider with your payroll system. This means that pension contribution calculations will be easily managed centrally and you won’t need to make individual contribution calculations yourself.

You will need to set your contribution amount – this can be anything from 3% upwards. You then need to set your employee’s contribution. This has to be 5% upwards of their salary. The 3 and 5% represent the minimum contributions that can be made by either party, but either side may wish to contribute more.

If your employees decide to contribute more to their pension pots, you would simply adjust their contribution figure in your payroll system and the software will do the calculations for you.

You and your employees can either pay into the scheme monthly, quarterly or annually. The provider will usually give you a choice of payment methods and set up a schedule for you so that you don’t have to worry about it.

Finally,

Setting up a workplace pension scheme is a legal requirement for all employers with eligible staff and it’s intended to help workers build a secure financial future. Be sure to research and compare pension providers to get the best deal for you and your staff when it comes to on-going management fees and investment options.

Employers can choose to add more than the minimum contributions to create a competitive benefits package and employees can choose to increase their contributions too if they wish to put in more than 5% of their salary.

By taking these proactive steps, you not only meet your legal obligations but show that you’re invested in the long term success and wellbeing of your employees.

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