The Department of Work and Pensions (DWP) proposes that by the mid 2020s every worker aged 18 and over will be automatically enrolled in a workplace pension, unless they choose to opt out.

The proposal will increase costs for employers by an estimated £1.4bn per year. They are already facing rises in both the rates of Auto Enrolment (AE) contributions and the National Living Wage from April 2018.

Currently, pension AE does not require employers to enrol workers into a pension scheme until they are at least aged 22 and earning above £10,000. Those earning less than £10,000 can ask their employer to enrol them.

Lowering the age at which workers start to pay into a pension is seen as necessary, due to increased life expectancy and the amount of time people spend in retirement. An extra four years of contributions compounded to retirement could make a real difference to a worker’s final pension pot.

The DWP proposal to widen the net on workplace pensions to include those aged 18 to 21 may put pressure on the government and employers to reduce the earnings differential between those aged 25 and over on the National Living Wage and those under 25 on the lower rate of National Minimum Wage, particularly if school leavers are expected to contribute into a pension from day one.

As part of the move, further changes could include:

  • Contributions being based on a percentage of all earnings up to the higher rate income tax threshold (currently £45,000), instead of the present system based on earnings between £5,876 and £45,000.
  • Annual AE reviews on the levels of earnings and contributions that trigger enrolment.
  • Extension of workplace pensions to the self-employed.

Workplace pension contribution rates from April 2018

From April 2018, minimum workplace pension contribution rates will rise from the current 2% to 5% of earnings (2.4% from the worker, 2% from the employer, and 0.6% from tax relief).

The current 2% is made up of 0.8% from the worker, 1% from the employer, and 0.2% from the government in the form of tax relief.

There is a planned further rise from April 2019 to 8% of earnings (4% from the individual, 3% from the employer, and 1% from tax relief).

It is as yet unclear how workers will respond to these increases; some may choose to opt out of a workplace pension altogether, though apathy may result in few deciding to leave.

Employers groups, care homes and academies may decide to lobby the government to delay these increases.

Employers cannot force workers to opt out of a scheme, or discriminate against them for staying in one.

If you would like to discuss workplace pensions, please contact your usual Bishop Fleming adviser or a member of our Payroll Services team.

 
 
 

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