The introduction of automatic enrolment for workplace pensions affects different employers in different ways. But one feature which may be of particular interest for a funeral director business may be how the rules apply to part-time employees. BKL tax partner David Whiscombe explains.
This article was first published by the UK200Group.
Essentially, workplace pensions have been introduced based on a single employer model – but part-timers and zero hour contracts are not excluded. The fine detail is different for employees earning under £5,772 or under £10,000 per annum and at different ages.
Broadly, employees earning over £833 per month and aged between 22 and state retirement age are within automatic enrolment; other employees have the right to opt in to some kind of pension arrangement if they so choose.
An employer, of course, has no right to opt out of the arrangements – if he has any qualifying employees then he must set up a workplace pension and automatically enrol qualifying employees unless they choose to opt out. But opting out is really a misnomer: initially, enrolment is automatic and compulsory for qualifying employees. Once enrolled, employees can choose to leave the scheme: but they must initially be enrolled.
Employers have to contribute to schemes as well as employees if employees are earning over £5,772. To begin with, the employer contributes 1 per cent on income over £5,772, rising by 1 per cent in October 2017 and another 1 per cent in October 2018. For a national minimum wage employee on a 40-hour week this translates to the employer contributing £1.50 per week!
Automatic enrolment is required if an employee’s earnings exceed around £10,000 per annum or £800 per month or £200 per week for any pay period. An employee who works part-time and irregularly for a number of companies could easily go above the limit with some of them for particular pay periods and drop below the limit for others. This may be an administrative nightmare and employees with several part-time employments could end up with multiple pension pots worth only a few pounds.
One approach that has been suggested is for a group of employers with a common base of employees to make group arrangements with “shared” employees. But (quite apart from the practical and commercial difficulties) great care is needed here: it is against the law for an employer to take any action to induce anyone to opt out – this would include persuading or forcing staff to opt out by offering them a cash bonus to do so, however tempting that may be! A better option may be to consider using the government’s own NEST (National Employment Savings Trust) pension scheme.
More generally, new flexible drawdown may make pensions more attractive across the board and encourage pension saving, especially for mature employees – a group who are perhaps likely to be represented among part-time employees. Employers could allow employees who are above minimum wage to sacrifice part of their pay with the employer. The employer would make extra contributions into the employee’s personal pension fund, access to which is much easier than hitherto. Such sacrifices will often result in lower employer National Insurance Contributions, and employers may thus be willing to enhance the contribution with all or part of any saving.
So the simple “take-away” on automatic enrolment for part-time employees is that you can’t simply ignore it as irrelevant. In some cases the numbers will be below the automatic enrolment threshold but will always need to be checked. Penalties for failing to comply with the automatic enrolment law are potentially significant. This, perhaps more than any other aspect of workplace pensions, is an area in which advice from an Independent Financial Adviser is the only safe route.