If you are thinking about starting up your own business, the chances are you’ve heard of auto-enrolment. This is the mechanism that ensures eligible employees have the opportunity to build up a pension.
The automatic enrolment scheme is being rolled out over the next few years. Larger firms have already begun to work with it, but sooner or later most other companies will be obliged to give their workers the chance to build a workplace pension.
Are you an employee? Read our guide to auto enrolment for employees
In fact, if you have at least one member of staff, you will be required to auto-enroll all eligible staff, even if they subsequently opt out.
Who must be offered auto-enrolment?
An eligible employee is any paid worker who is at least 22 years old – but under State pension age. They must work in the UK and earn more than £10,000 a year. They don’t need to be enrolled if they are already paying into a workplace pension scheme.
As an employer, you will be told when your firm becomes part of the auto enrolment scheme: the scheme is being rolled out to the largest companies first.
The minimum contribution is 2% of an employee’s annual earnings, which comprises 1% from you, the employer, 0.8% from the worker and 0.2% as tax relief from the government.
Pensions jargon buster
Why is the scheme being introduced?
Auto-enrolment is intended to ensure workers have enough money to live on in retirement. Given the rising cost of living, the government will increase the minimum contributions over the next few years.
As of October 2017 the total contribution will increase by 3% to 5%, with 2.4% coming from the employee, 2% from you as the boss and 0.6% in tax relief. A further increase will come into force from October 2018, when the total contribution will reach 8%.
Your workers are entitled to opt out of the scheme after a month, however, you should point out that if they do so they will lose the employer contribution, as well as the government’s tax relief. Any money paid in stays there – adding to your worker’s pension pot.
Confused about the different types of pension? Find out more.
A word of caution about opting out
The maximum State pension you can receive is £113.10 a week – which is likely to fall short of most people’s expectations when it comes to what they expect to live on when they stop working. Of course, some workers will find any cut in their take home pay hard to deal with, but they should be encouraged to consider the benefits of auto-enrolment, and if they can’t stick with it at least be advised to review their options further down the line.