The only certainty we have in life is said to be death and taxes, but many would argue that getting older is also a certainty, whether by moments or by decades. With most of us intending to see retirement (AKA the good life) at some point, the importance of a good pension has never been greater.
However, recent changes to law and upcoming changes to pension contributions have put added financial and organisational pressures on employers and with this, implications to employees who may now be facing a noticeable dip in their income as more money is diverted away to their pensions.
In this blog post (which will serve as part 1 of a 2-part series on pensions and retirement), we’ll be looking at both sides of this coin, and what employers must be prepared for.
Be Prepared – increases ahead!
By law, every UK employer must place qualifying employees into a pension scheme (auto-enrolment), and pay contributions where appropriate. On 6 April 2018, employers had to double their contributions from 1% to 2%, while employees had to contribute 3%, up from 1%.
Originally, only large and medium-sized businesses were required to auto-enrol their employees, but as of 2017, the regime was expanded to cover businesses with fewer than 50 employees (with some exceptions for new employers).
Commercial law firm EMW suggests the complexity of the scheme, which typically requires resources that smaller businesses do not have, is to blame for a sharp rise in fines issued by the Pensions Regulator for pension auto-enrolment errors. In its research, EMW found that the number of fines in 2017-18 was 35,810, totalling £42m, up from £12.6m the previous year. The firm argues that the rise does not necessarily mean that employers were deliberately avoiding auto-enroling employees, but rather that the smaller businesses may not have the resources, infrastructure or record-keeping processes needed to accurately calculate contributions – an area where larger companies would use specialist payroll software, in-house HR departments and a team of accountants.
So, what is the small business owner to do?
Firstly, understand what auto-enrolment is and determine if it applies to your business circumstances; if at this time it doesn’t, you may decide that you still wish to provide your employees with the opportunity to contribute to a company pension scheme. If, however, it does apply to your business, effective actions worth considering include;
• Maintaining excellent records – Ensure your accounting and financial record-keeping is meticulous, as it’s essential for accurately calculating contributions. If you are unsure, do commit resources towards specialist payroll software (at the very least), or hiring a payroll specialist / accountant to oversee or to take care of the auto-enrolment process on your behalf.
• Creating a pension budget – With the upcoming increases, employing multiple employees will probably involve a fair amount in pensions contributions, so build these costs into your financial plan for 2019 and beyond (because no one will thank you for taking away ‘Cupcake Friday’ or the Christmas party!). If budgeting is not your forte, consider paying a financial advisor to come in and support you.
• Helping your employees by providing resources that they can read to answer any potential questions they have, such as the Government website.
What If Employees Wish To Opt Out?
From 6 April 2019, the minimum amount employers will have to pay in contributions is rising to 3%, with employee contributions rising to 5% (the total combined payments made by companies and their employees must be no less than 8%). This increase does equal a pension pot in the future, but it also means millions of people will see smaller pay cheques in the present.
For many of us, gone are the days of ‘putting away’ for future retirement – we want to live now, and the thought of sacrificing money today for a time that may not come, for some of us, can be jarring. As a result, it’s believed that many employees will now choose to opt out, as is their right, as they find that they cannot (or will not) do without the extra money each month.
Opting out will certainly have an effect on the final pension pot, so as an employer who no doubt cares for their employees, you may want to ensure they understand and appreciate the full implications of making this decision, by;
• Having a conversation with them about the upcoming rise in contributions, so that everyone is aware, and all concerns are voiced.
• Where necessary, directing your employees to pension advisors who can give them forecast figures as to what their final pension pot could be, whether they choose to continue contributing or to opt out. The government also provides a ‘Pension Wise‘ service for additional guidance.
• Providing access or referrals to independent financial advisors who can help employees find ways of re-organising their personal monthly budgets to accommodate the drop in take-home pay. With expert support and an external eye, many may find that making adjustments is not so painful after all.
People are living much longer, meaning realistic pensions are becoming more and more essential, so these rises are likely to continue. Be prepared – ensure you are well-organised with a good financial plan and pension budget in place for your business (using expert help wherever needed), and that any employees unhappy with the upcoming rise in their contributions are placed in a good position to make a well-informed choice about what to do next.
(For more details on EMW’s research into the impact of the pension auto-enrolment scheme, you may wish to read the full article here).