Essential guide to pensions for your employees

Every business is obliged to auto-enrol and contribute to eligible employees' pension schemes. Companies that fail to comply can face tough penalties. If you do not already provide a pension scheme, you must identify a scheme which you can use to fulfil your duties.

Pension scheme benefits

Auto enrolment

Pensions options

The run up to retirement

1. Pension scheme benefits

There is no escaping the cost of providing occupational pensions, but retirement schemes can deliver a number of benefits.

Providing a pension scheme will help you comply with the law

• Businesses are required to provide an 'automatic enrolment' scheme for eligible employees.
• You must pay pension contributions for almost all staff, unless employees specifically opt out.

You have flexibility over how you meet your obligations

• You can invite new employees to join an existing pension scheme, provided it meets the automatic enrolment criteria, or you can amend it so that it does.
• You can use your existing scheme for existing members (provided it is suitable or amended to meet the requirements) and set up another scheme for new staff.
• You can set up another pension scheme to fulfil automatic enrolment duties for all eligible jobholders.
• To amend existing arrangements, approach the current pension provider. Be aware that they are likely to promote only their own products or those of a limited number of suppliers.
• You are no longer required to provide access to a stakeholder pension scheme. However, if you have a stakeholder scheme, you must continue to pay contributions for all employees who are already members until they stop making contributions.

Contributions generally qualify for tax relief

• Employer contributions are treated as a business expense.
• Employee contributions benefit from income tax relief on contributions up to 100% of annual earnings subject to an annual allowance of £60,000 (£40,000 prior to 6 April 2023).
• The annual allowance is reduced by £1 for each £2 of income between £150,000 and £210,000. The minimum allowance is £10,000.

A competitive pension scheme is an invaluable employee benefit

• Providing a good company pension helps retain existing employees.
• It can improve your business' reputation as an employer and help you attract employees.

You can help employees save for a higher retirement income

• The new single-tier basic state pension is £221.20 per week (from April 2024) for those that reach state pension age on or after 6 April 2016 and have accrued 35 years' National Insurance Contributions (NICs) or credits.
• Those who reached state pension age before this date will receive the old state pension of £169.50 (from April 2024) a week if they have accrued 30 years' NICs or credits.
• There is a means-tested pension credit guarantee which will top your income up to £218.50 if you are single or £332.95 for couples (April 2024).

2. Auto enrolment

Auto enrolment now applies to all employers

• All employers, including first-time employers, must now automatically enrol any eligible worker into a contributory pension scheme.

Employers must automatically enrol all qualifying workers into a pension scheme

• A qualifying worker is one aged between 22 and state pension age, whose salary is over the automatic enrolment earnings trigger (£10,000) and who is not already a member of a qualifying pension scheme.
• Non-eligible workers aged between 16 and 74 who earn at least £6,240 (entitled workers) have the right to opt in to the pension scheme.
• Employees who earn less than £6,240 have the right to join a pension scheme but the employer does not have to pay pension contributions.

Your pension scheme must meet the new standard

• You can use the NEST scheme set up by the Government or choose an alternative scheme (see Pension options).

There is a minimum level of contributions that must be paid for eligible staff

• The minimum contribution is payable on earnings between £6,240 and £50,270.
• Employer contributions must be at least 3% of qualifying earnings.
• Total contributions (including employee contributions) must be at least 8%. So if the employer pays 3%, the employee must pay at least 5% (made up of a 4% employee contribution and 1% tax relief).
• Employers and employees can choose to make higher contributions than the minimum required.

Eligible workers may decide to opt out, but must make a positive decision to do so

• Those who do opt out will be automatically re-enrolled after a given time.
• Workers may opt back in, but employers will not be required to accept opt-ins more than once every 12 months.

Employers who fail to comply face fines

• Daily charges can be up to £10,000.
• Employers who deliberately fail to meet their obligations can face criminal prosecution and even imprisonment.

3. Pensions options

Employers can choose to use the NEST scheme or another pension scheme. Offering a better scheme can attract and retain key staff.

You can continue to manage an existing scheme if it meets the qualifying criteria

• The rules vary for different types of occupational scheme.
• The easiest way to check is to ask the scheme's trustees or provider.

You can set up a new scheme

• A defined benefit scheme could be a risky choice. Unless you are certain of reliable long-term profits it could prove too expensive.
• A growing trend is for group personal pension schemes. These combine the benefits of personal pensions (particularly portability) with the benefits of group schemes (lower costs).
• Depending on the level of contributions and costs, setting up a new scheme could prove cheaper than maintaining existing plans but the benefits could be lower.

Check how much administration will be done by the pension provider

If you are planning to set up a new scheme, you should take responsibility for:

• transferring the employee and employer contributions to the pension provider
• raising or reducing employee contributions, as requested (preferably at set intervals)
• dealing with enquiries from employees about payments in or out

You have some flexibility over what to offer

Provided that you meet qualifying criteria, you can decide:

• What benefits you want to offer, eg death-in-service benefits, or ill-health retirement pensions.
• When you want to start contributing. Starting contributions a couple of years earlier can make a substantial difference to retirement incomes.
• The rate of contributions. By increasing your contribution to 4% and employee contributions to 6%, after 20 years an employee's pension fund could be almost 50% larger.

4. The run up to retirement

Employees can no longer be retired unless there is a fair reason for dismissal

• For example, capability or conduct.
• Alternatively, the employer may force retirement if it can be 'objectively justified', but in most situations this is unlikely.

Provide employees with a pensions forecast

• Your pension provider should be able to provide a reliable forecast of the employee's pension.
• Employees can get an estimate of their state pension from the Future Pension Centre.

Offer your employees independent financial advice

• Pensions advice worth £500 a year can be offered as a tax-free benefit to employees.
• Employees with a defined contribution pension can get free and impartial guidance on pension choices at retirement through Pension Wise.

Note

Employment law is complex and is changing rapidly. This factsheet reflects our understanding of the basic legal position as known at the last update. Obtain legal advice on your own specific circumstances and check whether any relevant rules have changed.

Expert quote

"Many employees want to save for their retirement but are put off because they are not sure where to go to gain more information." - Frances Corbett, Head of the PLSA Academy at the Pensions and Lifetime Savings Association