February 2, 2018

Prepping for the AE Pensions Increase – What’s Next for Auto Enrolment?

Six years after the launch of pensions auto enrolment, February finally marked the last staging date for the UK’s smallest employers to enrol their employees into a workplace pension scheme.

According to figures from the Pensions Regulator, one million employers have now enrolled their employees into a pension through auto enrolment.

The government-led programme launched in October 2012 with the UK’s largest businesses, and has meant a further nine million people are now enrolled in workplace pensions.

However this is only the beginning.

Government plan to bolster pension pots through auto enrolment

To get workers to save more money for retirement, the minimum total contribution – currently at two per cent combined employee/employer – will increase to five per cent in April 2018 (with the employer paying a minimum of two per cent).

The following year, it will increase again to 8 per cent, with the employer paying a minimum of three per cent.

Changes such as these will make a real difference to UK pension savings. As a result of auto enrolment, a total of £17bn a year will be going into workplace pensions by 2019 to 2020, according to the Department of Work and Pensions.

What are the minimum contribution changes?

Currently, a total of two per cent of ‘qualifying earnings’ must be paid into a pension scheme for each employee, with at least one per cent of this coming from the employer.

Qualifying earnings means the share of earnings between £5,876 and £45,000 for 2017/181 (so the employee does not need to pay one per cent of their total earnings).

The changes are happening year-on-year in April in both 2018 and 2019:

  • April 2018: the minimum contribution rate will rise to five per cent of qualifying earnings, with at least two per cent from the employer
  • April 2019: the minimum contribution rate will rise to eight per cent of qualified earnings (for Self Certification schemes, the minimum will vary between seven and nine per cent – depending on which set is used), with a minimum of three or four per cent required from the employer

No action needs to be taken if the combined employee/employer contribution is currently above these new rates when they are due to increase.

More guidance on the latest payroll legislation

Informing your employees

It’s good practice to inform your employees that the change is coming, and explain the reasons why it will be beneficial them.

The increase may prompt a minority of employees to opt out of auto enrolment completely. It is important they understand that if they do this means they will be losing out on the contribution their employer will give them towards their pension. It also means that they will be automatically re-enrolled when your three-year cyclical period is due.

The new State Pension only currently amounts to around £8,300.

Therefore, if employees want a higher quality of life in retirement many will need additional income and this is a cheap and easy way to do that.

The Pensions Regulator has stated that you should not openly advertise that opting out is an option, and they have produced a template letter (Word doc) for employers to use.

1. These will increase to earnings between £6,032 to £46,350 in 2018/19.

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About the author

John Spooner

About the author

John Spooner

With 48 years’ experience in payroll, John (now retired) worked in both the public and private sector including 18 years in outsourcing. His previous roles included Payroll Manager, Operations Team Manager and Best Practice Consultant.

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