Workplace pensions: rethinks, warnings and dilemmas

  1. James Martini

    James Martini Contributor

    1,010 3
    1 |

    A poll about workplace pensions with a hint of Shakespeare’s Hamlet about it was recently started on the Forums: to pension or not to pension, that was the question.

    Workplace pensions are in the news this month, and rightly so after the minimum contributions increased on 6 April 2019. That leaves more than 10 million workers in the UK seeing a bigger percentage of their salary being automatically diverted towards their occupational pension, starting on their next pay day.

    The new minimum contribution rates mean employees, their employers and the Government will all be contributing more to these workplace pensions through auto-enrolment, a government scheme Work and Pensions Secretary Amber Rudd recently described as “an extraordinary success story”.

    For employees aged between 22 and state pension age, and earning more than £10,000 a year, this could mean less take-home pay as their minimum contributions increased for 3% to 5% at the start of 2019/20.

    Employers will also start paying marginally more towards their staff who are automatically enrolled into a workplace pension the next time payroll is run, as minimum employer contributions rose from 2% to 3% at the same time.

    Forcing small businesses into a rethink

    With minimum employer contributions remaining at 1% for the five-and-a-half years after auto-enrolment was rolled out in October 2012, some small businesses in the UK have been rather generous with their contributions.

    UKBF newcomer Adrian2 runs a microbusiness with four employees in central London, and has been picking up the bill for both the employee and employer contributions towards his staff’s workplace pensions.

    Having absorbed a 1% increase in minimum employer contributions in 2018/19, he’s contemplating a rethink after the rate went up by another 1% for 2019/20. But what options are there for him, and other small business owners like him?

    With the increased salary sacrifice of his employees, he could shelve plans for a payrise in 2019/20. This would effectively put the ball in the employees’ court in terms of whether or not to stay opted in to their workplace pension.

    “Fear not,” said Adrian2. “I have more diplomacy skills than Henry Kissinger!”

    Opting out of auto-enrolment

    All workers automatically enrolled into a workplace pension can choose to opt out of their workplace pension, however, employers cannot actively encourage staff to opt out as it would be considered ‘inducement’.

    Any decision to opt out must be taken freely by the employee without influence from the employer, which faces being on the wrong end of a hefty fine or worse if found to be in breach of the rules.

    Last autumn, a national recruitment agency based in Derbyshire was slapped with a record fine for plotting to encourage workers to opt out of their workplace pension scheme.

    It prompted The Pensions Regulator to fine the agency £280,000, while Judge Nirmal Shant QC issued suspended prison sentences to the agency's owner and director. Should they break these terms in the next two years, they can expect to spend four months at Her Majesty’s pleasure.

    A dilemma for employees?

    With workers being able to opt out of auto-enrolment at any time, some argue it presents a choice between saving for their retirement or taking the money now. Recognising this, UKBF free member leftthenright created an intriguing, if rather subjective, poll: to pension or not to pension.

    But any dilemma on whether or not to continue with this salary sacrifice or opt out of contributing to a workplace pension is mitigated somewhat by a tax cut that also took effect from 6 April 2019.

    Chancellor Philip Hammond’s decision to raise the personal allowance from £11,850 to £12,500 for 2019/20 resulted income tax being paid on earnings above this threshold.

    Experts also argue that in most cases, by opting out of auto-enrolment, employees would actually be worse off as they would miss out on the money their employer puts into their workplace pension, plus tax relief at the basic rate from the Government.

  2. Adrian2

    Adrian2 UKBF Newcomer

    29 1
    Thanks for the mention in this editorial.
    I received few comments back but no real insight as to what other SME employers were doing with their employer vs employee contributions; so we eventually went for 5% and 3% employer / employee contributions respectively. The staff seemed happy to go with this and it turned out that 2 of them were adding their own monthly top-up payments of up to £300pm anyway! So the company imposing a 3% salary sacrifice was not neither here nor there, as they can make their own adjustments to their voluntary monthly top-up amounts.
    Posted: Apr 18, 2019 By: Adrian2 Member since: Nov 12, 2018