By July 25, 2014 Read More →

Auto enrolment clock counts down to small businesses

Auto enrolment clock counts downDoes your home business have employees?

You probably already know that the rules on pension provision for employees have changed.

Today’s sponsored post by accountants Baker Tilly looks at the roll-out of auto enrolment pensions to smaller companies:

It’s something that the vast majority of companies have been able to ignore so far.

But now the roll-out of auto enrolment has extended way beyond the giant employers like Tesco and B & Q, with a record 10,700 businesses scheduled to start the auto enrolment of employees at the beginning of July 2014. 

It’s not surprising, therefore, that major firms of accountants like London–based Baker Tilly are warning clients not to suddenly be faced with a panic at the 11th hour. Setting up a new pension scheme with auto enrolment of all employees is not something that can be done overnight, so companies are being advised to draw up a timetable well in advance and stick to it.

It’s not that difficult to understand why the government is introducing compulsory workplace pensions for all. People are living longer due to improving living standards and advances in healthcare. The state’s future pension obligations are therefore destined to grow to a point at which they are unsustainable on the basis of taxes paid by the likely remaining workforce.

You don’t have to look far to see why the government sees auto enrolment as vital. According to the Department of Work and Pensions, in 2005 there were 4 people working for every pensioner. Alarmingly, by 2050, it’s now expected that this ratio will change to just 2 workers per pensioner.

Far too few people have been taking steps to make private pension arrangements to supplement meagre state provision. And of those, far too many have seen their pension pots decimated by mismanagement and excessive fees and commissions.

The beauty of the auto enrolment concept is that everyone over 22 and earning over £10,000 a year is automatically enrolled into a company pension scheme. The onus is then on them as individuals to opt out if they want to. In this way participation becomes the default position whereas, historically, this has been the other way round.

The government has planned to bring contributions up to their maximum level over an extended period of time so that employees will not suffer a seismic shock to their take-home pay and opt out before they have barely got started.

It’s not until October 2018 that, under auto enrolment, total contribution levels reach their target of 8% of payroll. This will comprise 3% from the employer, 4% from the employee, and the remaining 1% coming from the government in the form of tax relief.

Smaller companies getting nearer their staging date – the date at which they are compelled to commence auto enrolment – will need to decide who is going to manage the scheme on its behalf:

– The default position is to use the government-backed National Employment Savings Trust (NEST) which one might be assumed to be as safe as houses but with a rather pedestrian performance to match.

– By contrast, an established private provider like Standard Life or Scottish Widows might offer slightly more adventurous investment strategies with the required levels of security.

The only problem here is that, as the auto enrolment deadline approaches for tens of thousands of smaller companies, the private providers may well get swamped and be forced to turn smaller businesses away. This is just another valid reason to plan your timetable for auto enrolment well in advance of the actual staging date.

Auto enrolment may seem like just another government-imposed burden on companies of all sizes but early participants are reporting a number of benefits including improved staff contentment and loyalty.

To find out more take a look at this updated guide on Auto Enrolment.

Posted in: Saving money

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