- Know your legal obligations on pensions
- Automatic enrolment into a workplace pension
- Defined benefit pension schemes
- Defined contribution pension schemes
- Stakeholder pensions
- Promoting stakeholder and group personal pensions to employees
- Keep employees informed about pensions
- Contracting-out of the additional State Pension has ended
Automatic enrolment into a workplace pension
The duties employers must comply with on automatic enrolment of workplace pensions
All employers must provide workers with a qualifying workplace pension. This is called automatic enrolment.
The Pensions Regulator has produced employer guidance on automatic enrolment with help specifically aimed at small and micro employers. If you already have a workplace pension scheme, check with the Pensions Regulator if you can use it for automatic enrolment.
Who will be automatically enrolled?
You must enrol into the scheme all workers who:
- are aged between 22 and the State Pension age
- earn at least £10,000 a year
- work in the UK
You must make an employer's contribution to the pension scheme for those workers.
What about workers who don't have to be automatically enrolled?
Any worker who falls outside the eligible age band - aged 16 to 21, for example, or state pension age to 75 - may opt in to workplace pension saving with a minimum contribution from you.
However, you don't have to contribute to the pension scheme if the worker earns these amounts or less:
- £6,240 yearly
- £520 monthly
- £480 four-weekly
- £120 weekly
When workers are enrolled into your pension scheme, you must:
- pay at least the minimum contributions to the pension scheme on time
- let workers leave the pension scheme (called 'opting out') if they ask - and refund money that they have paid if they opt out within 1 month
- let workers re-join the scheme at least once a year if they've opted out
- enrol workers back into the scheme once every three years if they've opted out and are still eligible for automatic enrolment
- encourage or force workers to opt out of the scheme
- unfairly dismiss or discriminate against workers for staying in a workplace pension scheme
- imply someone's more likely to get a job if they choose to opt out of the pension scheme
- close a workplace pension scheme without automatically enrolling all members into another one
Pensions for seasonal and temporary workers
Like other employees, when recruiting seasonal staff or temporary workers, you must assess them to see if they qualify for automatic enrolment into a workplace pension. Assessing these types of employees can take more time because of varying hours and earnings.
Employers who know their staff will be working for them for less than three months can use postponement. This postpones the legal duty to assess staff for three months. During this postponement period, employers will not need to put staff into a pension unless they ask to be put into one. See the Pensions Regulator's guidance on employing seasonal or temporary staff.
What you must tell your workers
When you automatically enrol workers into a workplace pension scheme, you must write to them. In the letter, you must tell them:
- the date they've been added to the pension scheme
- the type of pension scheme and who runs it
- how much you will contribute and how much the worker will have to pay in
- how workers can leave the scheme if they want to
How much will you have to contribute?
Where a worker is automatically enrolled in a defined contribution (DC) scheme or NEST (the National Employment Savings Trust), there will be a minimum contribution of 8 per cent of qualifying earnings, of which the employer must pay a minimum of 3 per cent. If the employer chooses to pay the minimum 3 per cent, the worker will pay 4 per cent, with a further 1 per cent paid as tax relief by the government. Qualifying earnings are earnings between £6,240 and £50,000.Also on this siteLanding page category
Defined benefit pension schemes
Understand final-salary pensions and their legal requirements
Defined benefit pension schemes are also known as 'final salary' or 'salary-related' pensions. They promise to provide individuals with a certain amount each year upon retirement. How much is paid doesn't depend on investments.
The amount you'll get depends on your salary and on how long you've worked for your employer. The pension scheme administrator can give you more details.
Defined benefit pension schemes are usually based on an individual's final earnings at or near retirement - or when they leave the company if this is before retirement - and how long they were in the scheme. These are also known as salary-related or defined benefit schemes. See how to choose the right pension scheme.
Defined benefit pension schemes generally operate through a trust that receives contributions from the employer and employees and pays out members' benefits. The trust's objectives are set out in the trust deed, and the day-to-day decisions are made by the trustees.
There are a number of legal obligations governing the relationship between the employee, the trust and the employer:
- the employer is bound, like the employee, by the legal obligations of the contract of employment - for example, the payment of pension contributions
- all trustees, including those nominated by the employer, must act in the interests of all the scheme's beneficiaries - which includes scheme members, but may in some rare situations also include the sponsoring employer rather than those of the company
- the employer has a duty to notify the Pensions Regulator if there is any reason to think that there are any problems or wrongdoings occurring in the scheme and that the wrongdoing is important to the Pensions Regulator
- the employer is responsible for ensuring that any employee contributions deducted from pay reach the pension scheme within 19 days of the end of the month in which they were deducted, and that any employer contribution arrives when it is due
- the employer must ensure that the assets of the pension fund are kept totally separate from those of the business
- the employer must ensure that employees are informed and consulted on developments that affect the pension fund
- trustees must be assisted in the performance of their duties - employee trustees must be given paid time off to undertake those duties and any necessary training
The Pensions Regulator provides a free, online learning programme called the Trustee toolkit.
Defined contribution pension schemes
An overview of money-purchase pensions and employers' responsibilities in respect of them
In a defined contribution pension scheme, also known as a 'money purchase' scheme, the final pension amount will depend on:
- the amount of money paid in
- the investment performance of the pension fund
- the age at which the fund is used to purchase an annuity - the later this is, the higher the annuity payments are likely to be
- the level of annuity rates at the time
- the ancillary benefits offered - such as spouses' pensions, or annual increases in pensions paid
Some employers provide occupational defined contribution pension schemes for their employees. Both employers and employees can make payments into such a pension scheme. Once the employee leaves, these payments cease.
The investment risk is moved from the employer to the employee with an occupational defined contribution scheme and the risk that the employer will have to find substantial extra sums of money to fund the scheme because of poor investment performance is eliminated.
Occupational defined contribution schemes generally operate through a trust. Objectives are set out in the trust deed and day-to-day decisions are made by the trustees. Employers still have some key responsibilities, either as employers or as trustees - for example, on the level of employer contribution, or the extent of provision for dependants.
Defined contribution schemes must offer members the open market option whereby members can transfer funds at retirement to draw an immediate annuity with another provider. Members of a defined contribution scheme approaching retirement will need timely information on this option and other retirement income options.
Employees can also make regular payments for their retirement through individual personal pension schemes. These are defined contribution schemes and the risk of poor investment performance is carried by the employee. In some cases, employers will make payments into these schemes for the benefit of their employees.
Some employers may also arrange for a pension provider to set up a group personal pension (GPP) arrangement. In a GPP, employees contribute to individual personal pensions which are then grouped together and managed by the pension provider, to reduce costs. The employer may often pay the administration costs of running a GPP.
Tax relief on pensions
Employees can contribute up to 100 per cent of their earnings and get tax relief (or even if an employee's earnings are less than £4,000 a year they can get tax relief on contributions up to that amount as long as the scheme uses the relief at source method for giving tax relief). However, there is a limit on the amount of tax relief that may be given on pension scheme contributions and other increases in pension rights each year. The annual allowance for tax year 2020-21 is £40,000.
Employer contributions also generally qualify for tax relief as they can be set off as expenses, although employers should seek professional advice to make sure their contributions qualify as true business expenses. See how to choose the right pension scheme.
Most personal pension decisions are made by individual pension holders and the pension managers (the 'pension providers'), or investment specialists. However, employers are still legally obliged to ensure that employee contributions deducted from wages reach the fund within 19 days of the end of the month in which they were deducted.
The responsibility for registering the pension scheme rests with the pension provider. You must also keep employees informed about pensions.
Overview of stakeholder pensions for employers
Stakeholder pensions work in the same way as personal pension arrangements, and are normally accessed through an employer, although they can also be bought directly from the pension provider.
The rules for stakeholder pensions changed on 1 October 2012. Employers are no longer required to designate a stakeholder scheme for their employees. However, stakeholder pension schemes can be used by employers for automatic enrolment purposes provided the scheme meets the necessary criteria.
If you had employees in a stakeholder pension scheme before 1 October 2012, you must carry on taking workers' contributions from their pay and send them to the scheme if the worker wants you to.
Promoting stakeholder and group personal pensions to employees
Ways employers can promote their schemes without infringing financial regulations
You may be thinking of offering, or have already offered, your employees a stakeholder or group personal pension scheme. You may want to promote your pension scheme to them, or find that they are looking to you for help. But as financial services are regulated, you may be unsure about what you can do.
The Financial Conduct Authority (FCA) regulates financial services in the UK. They offer information about what you can do to promote your stakeholder or group personal pension scheme to your employees and how you can give them further help or advice without needing to be authorised. Download an FCA employers' guide on promoting pensions to employees (PDF, 165K).
The FCA guide only covers stakeholder pension schemes and group personal pension schemes. It does not cover occupational pension schemes.
Keep employees informed about pensions
When you need to keep employees informed of changes to your workplace pension scheme
You now have a duty to inform and consult your employees about significant changes in any occupational pension scheme you offer, or personal pension schemes you contribute to, by a direct payment arrangement on behalf of your staff.
Occupational pension schemes
For occupational schemes, you need to inform and consult on changes about:
- increasing the pension age
- closing the scheme to new members
- closing the scheme to existing members
- removing liability for employer contributions
- introducing member contributions
- reducing employer contributions to defined contribution schemes
- changing to money-purchase benefits
- changing the method of determining the rate of future accrual
Personal pension schemes
For personal pension schemes, you need to inform and consult on changes about:
- ceasing employer contributions
- reducing employer contributions
- increasing employee contributions
You have to provide information to affected members and/or their representatives in writing before the changes occur. You must describe the changes and their effect on members, accompany it with relevant background information and indicate the timescale. At least 60 days consultation must be allowed before the decision to make the change is made. Consultation must be conducted with a view to co-operation.
There are some exceptions to the consulting requirement. It does not apply to:
- employers with less than 50 employees
- public service schemes
- small occupational schemes with less than 12 members who are all trustees of the scheme
- occupational schemes with less than two members
- schemes not registered with HM Revenue & Customs
If you are consulting with employee representatives, you must give them paid time to undertake their duties and must not subject them to dismissal or any other detriment due to their need for such time - otherwise they can take you to an industrial tribunal.
See how to inform and consult your employees.Also on this site
Contracting-out of the additional State Pension has ended
Contracting-out of the additional State Pension ended on 6 April 2016
On 6 April 2016, the Pensions Act 2014 and the Pensions Act (Northern Ireland) 2015 introduced a new State Pension in Great Britain and Northern Ireland for people reaching State Pension age on or after 6 April 2016.
This scheme replaces the basic and additional State Pension and ends contracting-out and the National Insurance rebate.
To assist employers and employees, factsheets and overviews in relation to the ending of contracting out have been prepared by the Department for Work and Pensions and HMRC.
References in the guidance to the Pensions Act 2014 should be taken as including references to the Pensions Act (Northern Ireland) 2015.Also on this site