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Carrying forward unused pension annual allowance
Money that you pay into a UK registered pension scheme or qualifying pension scheme receives tax relief. Personal pension contributions are paid from your earnings after tax and the pension provider reclaims the 20% tax suffered. All employers will soon be required to offer pension schemes to employees, so now is a good time to think about what you can contribute to your pension scheme.
Anyone can make (gross) contributions each year of £3,600, but above this threshold the maximum you can put into the fund is 100% of Net Relevant Earnings (NRE). Tax relief on contributions is only available up to the Annual Allowance (including any Annual Allowance carried forward).
Any unused annual allowance can be carried forward provided you were a member of a registered pension scheme, or qualifying overseas pension scheme during the year. The carry-forward relief can be used for any unused allowance from the previous 3 tax years. Assuming you were a member of a pension scheme, but didn’t have any contributions (personal or employer’s) in the tax years from 2011-12 up to 2013-/14, it would be possible to have total contributions of £190,000 in 2014/15.
Net Relevant Earnings
- Earnings from employment
- Benefits in kind
- Self-employed profits as a sole trader
- Share of profits from a partnership
- Any profit from furnished holidaylettings
- Less allowable business expenses
Alterledger can help
Alterledger can explain the tax implication of pension contributions for employers and individuals. Contact Alterledger or visit the website alterledger.com for more information.
A process started in 2012 which means eventually, all UK employers will be obliged to enrol all their eligible employees into a contributory pension scheme, known as Auto Enrolment. This obligation is already being phased in, starting with the biggest employers. The commencement date for an employer’s obligation to provide a contributory pension scheme is known as the staging date.
The government has said that no small employers (those with fewer than 50 employees) will be affected before the end of the current Parliament. The general election will be on 7th May so we are nearly there. Employers will be able to meet this obligation in any way they choose, but one way will be through a government-sponsored National Employment Savings Trust ( NEST ), a simple, low-cost scheme with very limited fund choice, and initial restrictions on transfers and contribution levels. NESTs will be operated by the NEST Corporation, a not-for-profit trustee body, and will be regulated by the Pensions Regulator.
Alterledger can help
Alterledger can help you prepare for your staging and manage your auto enrolment process along with your payroll once everything is up and running. Contact Alterledger or visit the website alterledger.com for more information.
The Pension Regulator’s latest post…..
Our report on the impact of automatic enrolment reveals that 99% of all the UK’s largest employers met their legal duties without the need for us to use our statutory powers.
This is encouraging news as thousands of medium employers are currently reaching their staging dates. We will continue to work over the months ahead to ensure that medium and small employers understand their obligations, comply with their legal duties and continue to view non-compliance by other employers as unacceptable
Are you ready for Auto Enrolment?
According to Now Pensions the 10 biggest headaches faced by employers are:
- An administrative nightmare – it doesn’t have to be nightmare provided you plan ahead and get help if you need it, accountants are the most used source of help and advice.
- Will payroll be able to cope? Yes but it takes planning and preparation
- A Communication challenge – Employees find pensions complicated and auto enrolment could be the first long tem savings product they have, so simplicity is crucial. Auto Enrolment does require the right correspondence at the right time, so make sure you get it right!
- Future Liabilities – The Pension Regulator enforces compliance and employers must not encourage or put pressure on employees to opt out.
- Middleware – this is software that makes your IT systems talk to each other, many SME’s will not need middleware as the payroll software will do the job of reporting the data to the pension provider
- Responsibility – Make sure you know where the responsibilities fall on your team, mistakes can be costly
- Existing Schemes – Not all existing schemes will be suitable for auto enrolment, check that your scheme will comply or change it
- Investment – Most employees will have never invested in their lives so its important to choose an auto enrolment provider who can help them decide on which funds to invest in
- Value for Money – NEST, Now Pensions and The People Pensions have very low charging structures
- What will it cost – Don’t forget the internal management costs when you choose a scheme, how easy will it be to operate?
We hear many of the same concerns about auto enrolment being raised on a regular basis in our discussions with employers of all sizes. So you’re not alone with your auto enrolment concerns. That’s why we’ve addressed ten of the biggest headaches and their remedies below.
1: An administrative nightmare
Get all the help you can before the staging date. Employers can lighten the load by partnering with providers that will do much of the work for them. Some pension providers have invested in technology that can automate the administration of auto-enrolment. This includes assessing which sort of scheme is most suitable for your workforce, working out which employees need to be automatically enrolled and calculating contributions and issuing communications to your employees based on the outputs of the assessment.
Once a clear process is up and running, administering auto-enrolment is relatively easy – but to get to that point organisations need to put the right systems in place. That means selecting your implementation partners, establishing who is responsible for which parts of the process and ensuring clear access to your HR and payroll data. A robust project plan is essential.
2: Will payroll be able to cope?
Yes, provided you make sure the correct people at your payroll provider and your pension provider are talking to each other and exchanging data in the right format.
A strategic decision is necessary to decide on whether payroll will handle employee categorisation ensuring that your auto-enrolment obligations are met compliantly or whether your pension provider will do this. Larger payroll providers and pension providers such as ourselves have the capability to create a record to demonstrate to the Pension Regulator that you have fully complied with your auto-enrolment obligations.
3: A Communications challenge
Employees find pensions complicated, and for many individuals an auto-enrolment pension will be the first long-term savings product they have ever held. So simplicity is crucial.
Research has shown that messages work best when they speak to employees in a language they understand, through a medium via which they like to be communicated. Messages delivered in the run-up to auto-enrolment are particularly important as they will set the agenda for the entire project. So think about what will work best for your workforce. A wealth of compliant communication material that can be tailored to the needs of your workforce is available at no cost from quality pension providers.
4. Future liabilities
The Pensions Regulator enforces compliance with the auto-enrolment rules, and one of its top priorities is ensuring employers do not encourage or put pressure on employees to opt out of the pension scheme after they have been automatically enrolled into it. It will be scrutinising employers that have unusually high opt-out rates. Employers that persistently break the rules by inducing staff to opt-out can be fined up to £10,000 a day. The Pensions Regulator is hoping whistleblowers will report it of breaches of auto-enrolment regulations.
Using compliant communication materials can alleviate the risk of regulatory action. Employers that use pension providers with auto-enrolment middleware will also have a report that demonstrates to the Pensions Regulator that auto-enrolment obligations have been fulfilled, although it will only be as accurate as the information given by the employer.
5: What is ‘middleware’?
Middleware is software that glues different IT systems together. In the context of auto-enrolment, that means analysing the age and salary data of your workforce, working out the earnings upon which contributions are based, taking deductions through payroll and paying them over to the pension provider.
For auto-enrolment to run smoothly both your payroll and pensions departments need to talk to each other. Unfortunately the fact that auto-enrolment crosses both areas can lead to confusion over who is responsible for what part of the process. This is best addressed by assigning auto-enrolment to a corporate sponsor high enough up in your organisation to ensure that responsibility for tasks is clearly apportioned, and delegating someone to be involved through the implementation project phase and beyond.
7: Existing Schemes
This will depend on the sort of scheme you have and how you decide to include your current non-pensioned staff. If your existing scheme already complies with the minimum criteria set for auto-enrolment, which relate to contribution rates, charges and default funds, then staff already in it will see no change.
You will need to make some important decisions about how you design your pension offering for the rest of your staff. Do you want a single scheme for everyone in the organisation? Do you want a multifaceted scheme for your senior staff and a more basic scheme for other tiers of your workforce? You may choose to preserve your existing scheme for those already in it, while automatically enrolling those not currently in it into a new scheme. Independent Financial Advisers or Employee Benefit Consultants can provide information and advice in exchange for a fee or Providers like NOW: Pensions can help you to analyse your workforce and provide suggestions based on our previous experience.
Many employees will have never invested this way before in their lives. Poor performance will not only create disgruntled employees – it will also leave some staff with pensions so low they cannot afford to retire when they get older. So choosing the right default investment fund is crucial for an employer.
The performance of different pension providers’ default funds varies hugely. Pensions are long-term savings vehicles which means that even very small increases in performance can make a significant difference. For example, over a 40-year investment, an annual return of 7% will deliver a fund 30% higher than one achieving 6%.
Look for a default fund with a proven track record, one that has delivered stable returns over a long period of time and in different market conditions, and is unlikely to have changed as this may increase the associated communication costs with your employees.
9: Value for money
Charges are one of the biggest factors in determining how much pension employees ultimately receive. Sadly, pensions that charges as much as 1.5% of the fund value each year are common in the UK. We charge just 0.3% of fund value plus a monthly £1.50
admin fee (£0.30 for low earners during the initial phasing process). For a 25-year-old earning £26,000 saving 8% of salary for 40 years, that can mean the difference between building up a pot of £716,000 rather than the £547,000* generated in a scheme charging 1.5%. Our low charge scheme gives the saver in this example 30% more pension for exactly the same contributions. It may sound hard to believe, but the more expensive provider takes an extra £169,000 in charges out of the saver’s pot.
*Assumes salary increases by 4% a year, fund increases by 7% a year.
10: What will it cost me?
The overall cost of auto enrolment will depend on where you go for your pension and what you need from your pension.
Costs not only include fees and charges but also, human resources and administration so it is important to bear the overall cost in mind when choosing a pension provider. With NOW: Pensions, the employer can either choose to pay nothing in the way of administration with the fees coming from the members or you may choose to pay these fees for your members (employees); on-going costs such as communications are minimal and there are no set-up fees.
It is important to get your provider right from the start as changing further down the line will incur many additional costs.
I love Holland but are their Collective pensions better than ours?
Collective funds pool all contributions into one big fund, so the administration costs are lower and pensions are paid from the fund rather than having to buy annuities.
By running funds collectively rather than individually (the British model) costs are reduced.
Some experts suggest that savers will increase their investment returns by 30%.
An article in the Telegraph 3rd June 2014 commented…
What is certain is that the schemes are a long way from the final salary “gold standard”. There are no guarantees, not even the certainty of a fixed income that you get with an annuity. You may get inflation-linked increases, you may not.
Assuming that these schemes do become available in the coming years, the best course for most workers would probably be to use them for some, not all, of their pension savings, with the rest in traditional schemes, self-invested pensions or Isas.
But will they ever see the light of day? There is little incentive for companies to back them – finance directors remember what happened with final salary schemes, which drove many firms to the brink of bankruptcy thanks to endless “gold-plating”.
So will your pension be going Dutch?
Not every employee will want to be in Auto Enrolment, for example they may have their own pension arrangements.
But be very careful that you don’t induce or encourage them to opt out.
Most employees will want to be IN
Once staff have been enrolled into the pension scheme, they have one calendar month during which they can opt out and get a full refund of any contributions. This is known as the ‘opt-out period’. It starts from the whichever date is the later of:
- the date active membership was achieved, or
- the date they received your letter with the enrolment information.
Staff can’t opt out before the opt-out period starts or after it ends. If they decide to leave the scheme outside this period, they will instead be ‘ceasing active membership’. Whether they get a refund of contributions will depend on the pension scheme rules.
Staff opt out by giving you an ‘opt-out notice’. The opt-out notice is provided by the pension scheme. This is to avoid any employer involvement in the decision to opt out, which could lead to a breach of the law.
If an employer does anything to encourage or induce an employee or potential employee (at interview) to opt out they will be subject to harsh penalties.
If an employee does Opt Out they will be re-enrolled every 3 years.
You can choose to postpone automatic enrolment for up to three months for some or all of your staff. You must write to your staff to tell them you’re postponing automatic enrolment for them. One of the times you can postpone is from your staging date.
- You can postpone automatic enrolment for up to three months from certain dates.
- If you postpone from your staging date, your staging date does not change.
- If you choose to postpone from your staging date, you must write to tell the staff who will be postponed within six weeks of your staging date.
- Its unlikely that your payroll processing period will match your staging date, most staging dates are the 1st of the month but many payrolls are weekly, it makes sense to start auto enrolment on a pay processing date
- If you have short term staff or you are a temp agency you will probably postpone in order to avoid unnecessarily assessing staff who will leave within the postponement period
- You may also postpone to reduce auto enrolment pension payments and admin
- You can choose any business reason
When can you postpone?
You can only postpone automatic enrolment from:
- your staging date
- a staff member’s first day of employment
- the date a staff member first becomes eligible for automatic enrolment.
If you postpone from your staging date, it doesn’t change your staging date.
Staff whose automatic enrolment you’ve postponed can choose to opt in to your pension scheme during the postponement period.
The Pension Regulator has further details
Don’t mess this up, if you don’t get postponement right…..
- You will get a Warning
- Followed by a penalty of £400
- Followed by fines of £500 to £2,500 per day (depending on the number of employees)
Even the smallest business will get fines of £50 per day!
You will initially be given a warning, which will be followed by a fixed penalty of £400. Not too severe so far, but then the penalties shoot up for those companies who still fail to comply.
If you employ between 50 and 249 employees the fine for on-going non-compliance is a whopping £2,500 per day. For businesses with fewer employees, between five and 49 the penalty is still £500 per day and even the smallest of businesses will be fined £50 per day.