By 2018, every UK employer will have to auto-enrol all eligible workers into a workplace pension. You’ll also have to pay at least 1% of employee's ‘qualifying earnings’ into your scheme.
Every worker in the UK who’s over 22, under state pension age, not already in a qualifying pension scheme, and earning more than £10,000 per year will be eligible.
All this means that every organisation will soon be legally required to operate a pension scheme. So now’s a good time to choose the most suitable kind for your company. There are several options to choose from.
1. Defined benefit workplace pensions
The ‘defined benefit’ in the name is based on the employee’s eligible earnings and how long they’ve been in the scheme, which determines how much they’ll receive when they retire.
Defined benefit pensions are a broad category that includes ‘final salary’ schemes and career average revalued earnings (CARE) schemes.
You can decide when drawing up your scheme what types of pay (e.g. overtime or bonuses) count as eligible earnings.
2. Defined contribution workplace pensions
Defined contributions schemes pool the employees’ and employer’s contributions and spread them across a range of investments. The amount paid out to retiring employees then depends on:
- How well the investments have performed
- How much was paid in on the employee’s behalf
- How long they’ve been part of the scheme
Some defined contribution schemes offer employees the chance to have a say on where contributions are invested.
3. Cash balance plans
Cash balance plans are a hybrid of defined benefit and defined contribution schemes.
The employee pay-out for all three kinds can be either an income during retirement, or a tax-free lump sum and income.
4. The National Employment Savings Trust (NEST)
NEST is a new government scheme available to all employers, as an alternative to setting up your own scheme. You could also use NEST for some employees, and set up your own scheme for others.
NEST is free to use, managed online, and was designed specifically for the new auto-enrolment rules. It’s a defined contribution-type scheme, with an investment approach that’s won several investment awards. More than 100,000 employers are already using NEST.
Rules for all scheme types
Whichever type of pension scheme you opt for, under the new pension rules you must:
- Inform employees in writing about the scheme you’ve enrolled them in
- Let employees leave your scheme if they ask to, and repay their contributions within a month after they opt out
- Let employees re-join your scheme after opting out, at least once per year
- Automatically re-enrol eligible employees who’ve opted out once every three years
Your organisation cannot:
- Encourage employees to opt out, or opt them out by force
- Close the scheme without enrolling employees into a replacement
- Unfairly discriminate against employees based on their decision to stay in or opt out of your scheme