NOW IS THE TIME TO TAKE ACTION OVER AUTO ENROLMENT – OR PAY THE PRICE
Many people in business like certainty and stability to make them feel confident and able to take risks . Surely no one in 2016 can say this has been a year of certainty for those in business .
By Fiona Scott Features Editor
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We ’ ve seen Brexit and subsequent discord in the EU and more latterly we ’ ve seen the ‘ Trump Factor ’. However the truth is , we simply don ’ t know yet what the impact of these things will truly be for business , large or small .
There are other changes on the horizon which , while they appear far less dramatic , are more tangible and definite . One of those is Automatic Enrolment .
Having spoken to many business people over recent months – some know exactly what it is , but others simply do not . They know it ’ s about pensions , they know they have to face it but their grasp of the detail is often poor .
So for the sake of clarity Automatic Enrolment is a Government initiative to help
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more people ‘ save for later life through a pension scheme at work .' The business community has been given time to prepare for the changes and there have been ‘ staging dates ’ for various types of businesses .
The truth is we are all living longer , drawing pensions for longer , we may have chronic health conditions which require treatment for longer and the Government is saying it cannot afford to pay through the welfare state for the growing older population .
There is a general move to make individuals save for their income in retirement . As part of this overall strategy , business is expected to take on even more responsibility for its employees ’ pension pots . The biggest overall culture change with
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this is that companies MUST offer a pension scheme and all eligible employees will be automatically entered into it – unless they proactively opt out . This must all be in place by October 2018 and it will be policed by The Pensions Regulator or TPR . In fact , the policing of the system has now begun and it ’ s increasingly robust .
The TPR issued 576 escalating penalty notices to employers that failed to comply between July and September this year , more than 15 times the amount in the previous three months . Employers who receive such a notice will receive a penalty of between £ 50 and £ 10,000 per day , depending on their size .
The number of fixed penalty notices given out , where employers are fined £ 400 ,
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increased more than four times on the previous quarter ’ s amount . Between July and September 3,728 fixed penalty notices were issued compared to 861 between April and June .
The increase , according to the TPR , comes as there was a 50 per cent increase in employers reaching their deadline to comply ie . their staging date .
Reasons employers give for not complying with the law have included illness or being short-staffed . The TPR says this is not ‘ reasonable ’.
The key experts to talk about what ’ s involved in auto-enrolment are Bath and Somerset ’ s HR firms , accountants and financial advisers .
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KeystoneHR Jo Kangurs and Caroline Carter from KeystoneHR have supported a number of clients through the stages of auto enrolment with particular focus on the HR implications .
Jo said : “ It is essential that employers get auto enrolment right as failure to meet the required obligations can have serious financial implications . HR can play a major role in getting the implementation and compliance right .”
There is a significant amount of administration involved from enrolling , re-enrolling , opting in or out , all of which have to be carried out within strict time constraints . It is therefore vital that employers have a robust system in place for keeping records and setting reminders .
As well as the administrative burden , employers may also need to take a look at their HR documents such as handbooks and contracts of employment . Caroline said :“ In many cases employment contracts will need to be updated to ensure they reflect new rules following auto enrolment .” She suggested that employers review their documents prior to their staging date and if they are unsure what should or shouldn ’ t be included to take advice .
Planning ahead , getting help if needed and communicating with employees will help ensure auto enrolment goes smoothly .
Dr Markas Gilmartin , Partner of Epoch Wealth Management , which supports many people in Bath and Somerset said any employee or employer who is confused should take independent financial advice . Individuals do need to understand what the implications might be for their future finances and planning .
He said :“ For example , let ’ s say you earn £ 60,000 and have six children . You are a Higher Rate Tax Payer ( HRTP ) and have lost your child benefit .
“ If you contribute £ 10,000 gross to a pension annually , you ’ ll get back 40 % income tax , possibly Employee and Employer National Insurance Contributions ( NICs ) and recapture Child Benefit which could equate to more than you contributed to the pension in the first place .”
Contributing to a scheme could also help those people who earn between £ 100,000 and £ 122,000 a year and who have found their personal allowance is gradually removed due to their earnings .
“ The Personal Allowance ( PA ) erodes away when you earn over £ 100,000 . For every £ 2 you earn over that amount , your PA reduces by £ 1 . As the PA is £ 11,000 , incomes between £ 100k and £ 122k are the most affected by this .
“ As a pension contribution essentially “ extends ” the Basic Rate / Higher Rate Tax threshold , those earning in this bracket will effectively receive tax relief at 60 %. This figure becomes 75 % if the employer contributes the NIC savings as well ,” he said .
Ian Lloyd Reforms introduced in the past two years have made pensions a great place to accumulate funds . They do however give clients a dilemma when they reach pension age and they need to consider which money to spend first to fund their retirement .
Pensions continue to benefit from generous tax savings when contributions are made with pension savers getting tax relief at their top rate of tax on money paid in . At age 55 the funds are available to draw on when required and the entire fund can be withdrawn . The first 25 % of the money drawn is tax free , the remaining funds are taxed at your marginal tax rate . When drawing on your pension funds you need to consider what money you will have to live on throughout your retirement and to plan ahead so that you don ’ t spend too much at an early stage and exhaust your pension savings too soon .
You also need to consider which money to spend first . If you have ISAs and other savings it is often better to spend that money first before you draw on your pension .
That is because pension monies can be passed on to your beneficiaries when you die and they can inherit this money free of Inheritance Tax ( IHT ). If your estate is likely to suffer IHT then your pension fund can be passed on free of IHT in addition to your usual allowance which is currently £ 325,000 per individual .
Even if your estate is not likely to suffer IHT there are other tax advantages of leaving your pension money to your beneficiaries rather than other savings .
When the time comes to draw from your pension fund you need to consider how this can be managed to avoid unnecessary large tax bills . Getting the timing right for withdrawals is crucial to avoid paying too much tax .
Accumulating money in a pension fund has never been more attractive . The considerable tax savings when money goes into a pension have always been attractive . The ability to draw out funds when it suits you ( from age 55 onwards ) or to pass these funds on free of tax make pensions an excellent place to hold funds . To make the most of this you need to give careful consideration to the timing of withdrawals and by doing this can save considerable tax both for yourself and for your beneficiaries .
10 THE BUSINESS EXCHANGE 2016
To find out more visit the TPR ’ s website at www . thepensionsregulator . gov . uk