2018 is set to be an important year for auto-enrolment.
Firstly, the phase-in period is over and now all employers have an immediate duty to enrol new and existing employees into a workplace pension.
Secondly, as the new financial year begins, the minimum contributions from both employers and employees is set to rise for the first time. This is a big change which both parties will need to prepare for.
Contributions describe how much is put into a workplace pension scheme each month by both an employee and their employer. The minimum contributions are set by the Government and dictate the lowest percentage of the employee’s qualifying earnings each must pay.
The employee’s contribution is taken directly from their wage or pay, while the employer makes their deposit directly.
During the roll-out phase, minimum contributions have been set at 1% for both employers and staff. However, in April, this will increase to 2% employer and 3% employee contributions, with a further increase to 3% employer and 5% employee contributions in April 2019.
As an employee
For employees, this is good news, as it means that their pension pots will receive bigger deposits. Additionally, it means that the responsibility to make a higher contribution is not solely on the employee, as the rise applies to both parties.
However, there is a worry among experts that employees will see the contribution rise as a reason to opt-out of their workplace pension. But research from Aviva has shown that of UK adults:
- 4% have firmly decided to leave their workplace pension once the contribution increase takes effect
- 12% will consider leaving their scheme
- 34% admitted that they do not know what they will do
- 50% are resolved to stay within their workplace pension scheme once the contributions increase happens
Those who are considering opting out of the workplace pension when contributions go up should give it careful thought. Having three parties paying into the pension will boost the pension pot significantly; and contributing in early life could ensure financial security in retirement.
As an employer
It is understandable that many business owners may be feeling apprehensive about the rise in pension contributions.
According to another study by Aviva, managing the cost of a workplace pension scheme is the most difficult aspect of implementing auto-enrolment. 45% of employers say that they are worried about the increase in contributions.
The same research showed that 2% of employers are unaware that they will need to make bigger contributions to their employee’s workplace pension at all, and 9% do not know how the increase will affect their business.
More than half of businesses say they will not be affected by the change, with 29% already contributing more than the proposed increase and 25% seeing no potential impact. The remainder say that they will have to cut costs and increase their prices to get by:
- 20% say that their employee’s pay increases will be affected
- 17% will be forced to cut costs elsewhere in the business to meet their obligations
- 9% face having to cut staff numbers
- 7% will increase their prices to make ends meet
However, research has also shown that many employers do feel responsible for their employee’s ability to afford retirement. 66% of employers are concerned about their employees’ pensions.
Unfortunately, when auto-enrolment is concerned, making the larger contribution is not optional. It is up to you to find your own balance between upholding your responsibilities and maintaining your bottom line.
With that in mind, it is essential that you start to prepare for the rise in minimum contributions to make the change as smooth as possible. You should begin by:
- Calculating how much you will be paying each month from April
- Analysing your current budgets and forecasts to see if there is anywhere that money could be taken from
- Seeking financial advice
We are available to discuss your business needs, helping you to stay compliant and manage your finances as a business owner and employer. Contact Sarah or Bev on 0115 9338433.