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Pensions: Your legal requirements as an employer

All small companies need to offer a pensions plan. Here’s what you need to know

People are living longer lives, and consequently they can enjoy more time in retirement. However, there's no escaping the reality that millions of Brits are not saving enough money during their working lives to meet their retirement aspirations. In fact, the government estimates that around seven million people will have insufficient funds to pay for their retirement. As a result, ministers are making changes to the pension system by amending the State Pension to become fairer and available to more people. But while this will be a foundation for retirement, most people will want to build up their own savings on top of this. Therefore, to encourage more people to save in a private pension, the government introduced  workplace pension reforms.

From 2012, employers will be required to automatically enrol all eligible jobholders into a qualifying workplace pension and to make minimum contributions to it. The eligibility of workers is as follows:

  • All jobholders in the UK aged at least 22 years old who have not yet reached state pension age (currently 65 for men and 60 for women, but rising to 66 for men by 2020 and 65 for women) and are earning more than £7,475 will need to be automatically enrolled into their employer's workplace pension
  • Jobholders aged between 16 and 22, and between state pension age and 75, who are earning more than £7,475, will be able to opt in to their employer's workplace pension
  • Those earning less than £7,475 a year may opt in to their employer's workplace pension

Employers will be able to choose the pension scheme their business will adopt, providing the scheme meets certain criteria. The two main types of private pension are salary-related and money-purchase schemes. However, another option will be a new simple, low cost pension scheme, NEST (National Employment Savings Trust), previously known as personal accounts. NEST will operate like any other trust-based, multi-employer defined, contribution, occupational pension scheme, however it will be focused primarily on low to moderate earners.

If employers choose a defined contribution scheme, they will need to contribute the equivalent of 3% of an employee's earnings into their scheme (for eligible jobholders earning between £7,475 and £33,540). This will then be supplemented by the jobholder's own contribution and around 1% of their earnings in the form of tax relief.

The government plans to gradually phase in the employer contribution levels, to help them adjust to the reforms, starting at 1%, then rising to 2% and 3% respectively. The jobholder's contribution will also be phased in during the same period.

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