Businesses across the South West face paying out hundreds of thousands of pounds in staff pension contributions when workplace pension reforms are introduced in October.
Under the scheme employees will be automatically enrolled into a new pension scheme known as the National Employment Savings Trust (NEST), unless their employer operates a scheme which meets minimum contribution levels.
Scott Harrison, director at Prydis Wealth, said: “For some organisations, particularly those with no existing pension scheme or low take-up rates among staff, the cost implications could be significant. Additional costs are likely to be an unwelcome consideration for most employers particularly in the current economic climate, but there are ways to make the payments more affordable.”
Levels of minimum pension contribution will rise eight per cent by 2018, including a three per cent employer contribution. This means companies consisting of one employee up to large businesses with more than 500 employees will be required by law to pay a three percent employer contribution and the individual staff member will have to pay a five percent contribution.
Scott explained: “Employers have some control over what basis to calculate contribution levels to the scheme, for example basing the payments to the pension on staff’s basic earnings or a contribution level based on staff’s salary between certain earnings bands.”
For example, someone on a basic salary of £20,000 a company will have to pay a minimum employer contribution of £433.08 per year, while the staff member will pay £721.80 resulting in less take home pay.
Scott continued: “Companies could consider using ‘salary sacrifice’ mechanisms as a means to help reduce the costs of funding the contribution and this would deliver scope to allow some national insurance savings into the overall payment.”
Via salary sacrifice, employees elect to reduce their salary and have their sacrificed salary paid into their pension. As the employer will not have to pay National Insurance (NI) on the sacrificed salary, this contribution can be enhanced by redirecting some or all of the NI saving into the employee’s pension.
Compliance with the regulations will be staggered from October 1 to April 2017. Smaller firms with less than 250 employees conforming to the guidelines from April 1 2014. Staff will be allowed to opt out of auto-enrolment, in which case employers will no longer be liable for paying employee contributions. However, those employees who do choose to opt out will be re-enrolled every three years. Employers will not have the option to opt out.
Companies who do not comply with the new regulations enforced by the Pensions Regulator, could face fines of up to £10,000.
For more advice and information visit www.nestpensions.org.uk