Government pension reforms

The recent reforms have implemented a new auto-enrolment scheme where employers are required to enrol eligible employees into a pension scheme automatically. Employers are also required to contribute to their employees’ pension funds.

Auto-enrolment

Employees that are eligible for the auto-enrolment scheme are:

  • Employees aged between 22 and the state pension age who are earning above £10,000 per annum.

The following employees are entitled to join a pension scheme to which the employer contributes but will not be automatically enrolled:

  • Employees aged between 16 and 21 years
  • Employees aged above the state pension age to 74 years
  • Employees earning between £5,824 and £10,000

All employees earning under £5,824 per annum will be entitled to join a pension scheme but have no right to employer contributions.

Minimum contributions

There are minimum contribution requirements of both the employer and employee and the government will also contribute to the pension fund by providing the employee with tax relief on their contributions. These minimum requirements are either based on the employee’s qualifying earnings or pensionable pay. The employer must confirm the method/level of contributions payable before the employee is enrolled.

Qualifying earnings

Qualifying earnings are earnings between £5,824 and £42,385 per annum and include:

  • Salary
  • Wages
  • Commission
  • Bonus
  • Overtime
  • Certain statutory pay

Pensionable earnings

Pensionable earnings are defined within the pension scheme but typically only include basic salary and not commission and bonuses etc.

Opting out

After being automatically enrolled, you are able to opt-out of the pension scheme if you do not want to be part of it. If you opt-out in the first month you will be treated as if you were never part of it and a full refund will be provided. To opt out you must complete an opt-out form which can be obtained from your pension provider.

Sanctions

Employers will be provided with a date on which they must implement this auto-enrolment scheme, the staging date. This will be provided to the employer in a letter. Employers MUST NOT ignore this letter. Employers are open to penalties and sanctions if they do not implement what is required of them. Potential penalties include fines of up to £10,000 per day of non-compliance and up to two years imprisonment.

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