Employers' mandatory pension contributions

03 February 2009

With the mountain of financial news around, it seems that the introduction of personal accounts in the 2008 Pensions Act has been overlooked.  The Government is acting on the Pension Commission’s report, which told us what we already knew, that most people are not saving for retirement. Of those that are saving, most pension funds are below the level required at retirement. If you add the fact that we are all living longer after retiring, we are creating a huge problem, as more retired workers become a burden on the state. Because of this all employers from 2012 will be compelled to make pension contributions (employees can opt out), and this time even very small firms are not exempt as they were with stakeholder plans.  Despite it’s worthy intentions, this will be a burden for many employers as they try to come out of recession.

Individuals aged over 22 and under State retirement age will be automatically enrolled into the existing work based pension schemes or if there is not one available, the soon to be introduced personal accounts.  Personal accounts are a new initiative in cheap-to-run retirement schemes.  There will be one scheme and companies will be invited to tender to run the scheme in due course, much in the same way as the Lottery. Firms running occupational or group schemes will be able to retain those, provided the legal minimum contributions are maintained. Employees outside the age range (either above or below) will have the option to opt in, and receive the same benefits as the other employees.

The target contribution to a scheme will be 8% of basic band earnings, of which at least 3% must be funded by the employer.  This will be made up by an employer’s contribution of 3%, an employee’s contribution of 4% plus 1% tax relief. Earnings on which these contributions will apply should start at app £5,000, with a maximum of £33,500 (calculated in 2006 and likely to increase).  On this basis all full-time workers, even those on minimum wage, will be included. The bandings should increase annually. Employee contribution levels will be phased in over 3 years, but the expected start date of the scheme is October 2012.

This will impact greatly on many employers, particularly those, I feel, who are in an industry with a high turnover of staff.

For further information contact Simon Ludden, Financial Planning Manager.

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