Pension planning's often not front of mind when you're starting a new business.
This is probably understandable, given pensions aren't usually associated with the design, building, selling and marketing activities that validate your idea and get the revenues coming in.
These are, after all, the vital elements that ensure your business' immediate survival in its early stages.
And in truth, at the beginning, they probably aren't the most pressing issue to address. So it's not surprising that people often push pensions down the 'to-do list', a decision additionally motivated by their complexity and archaic language too.
This guide focuses on pensions considerations for business owners with employees.
When do pensions matter in business?
Bringing on your staff
If you get to the stage that you're bringing on-board staff, then as an employer, you have legal obligations in relation to these employees. Those obligations include the mandatory requirement to put in place a pension scheme for those employees and automatically enrol them into it.
And even aside from the legal obligations, having a decent pensions arrangement can be an excellent incentive as part of your recruitment and retention proposals.
Using your pension to help finance your early build activities
Financing a move from being an employee with all the benefits and salary, etc protections that employees have, can be a financially and reputationally risky move, bringing a lot of uncertainty and stress. It's certainly not a move for everyone.
Some founders are able to release funds from a pension nest egg to help them bootstrap their early stages of business development. This can be a gamble, but one that pays off if the venture proves a success. You normally need to be over 55 to do this.
So you could find that you're considering your pension and any other savings earlier than anticipated.
Can pensions be used in any other way?
We asked our financial expert friends at Redbourne whether pensions can be used in other ways - for example, to offset business risk or as some kind of guarantee in support of a new business venture.
In Redbourne's experience, even where individuals have a sizeable pension fund, there is currently little appetite for this amongst lenders in the UK.
Employer obligations for employees
Take a look at our helpful video sound-bite exploring when you need a pension for the staff in your business.
if you’re an employer, the law requires you to set up a workplace pension. This enables you to automatically enrol those members of your staff who are classified as ‘eligible jobholders’.
Eligible job-holders are:
aged between 22 and the state pension age (this age threshold varies, you can check what’s relevant for an employee here)
based in the UK; and
earn over £10,000 per year.
You do not need to ask the employee’s permission to auto-enrol them.
Indeed, you should enrol them automatically and then leave it to them to decide if they wish to opt-out, (more on how opting out works below).
There are specific rules around this auto-enrolment obligation.
Becky talks us through them in the video sound-bite below.
All employers must now establish and run a pension scheme for their employees.
Both employers and employees will make contributions.
The government will also provide a contribution via tax relief.
There are very strict criteria to which businesses must adhere and
financial penalties for non-compliance.
Key takeaways are...
If you own a business that employs one worker or more, you’ll need to:
set up a workplace pension scheme that meets the rules
automatically enrol workers who meet the age and earnings criteria
pay contributions into the retirement pots of eligible workers, totalling 8% of earnings from April 2019
communicate the scheme to all staff, even if they ultimately decide, of their own free will, to opt out*.
Eligible jobholders must be enrolled so that their enrolment takes effect from the date that they first become eligible for enrolment (which might be their first day of work for a new recruit).
enrolment must be complete within 6 weeks of this date.
How do find the right provider?
Smaller firms have access to the Government backed NEST pension scheme which can be administered online.
Farillio is a fan of this particular pension scheme for startups. It's a solid place to start - although taking advice from someone who understands how pension schemes work, even at this initial stage, is still advisable.
NEST may not be the cheapest or best option, even for startups. Relevant factors in deciding this include the number of employees you have and the level of contributions that you and your employees intend to commit.
In Redbourne's experience, there are also a number of good options (and quite an active secondary market) for existing startup pension schemes to be improved.
You can find out more on NEST in particular below. Their website is also pretty clear and helpful.
Although the term 'automatic enrolment' is used, some employees may not want to be enrolled (perhaps they have their own pension already sorted, for example).
You must enrol them from the outset, but they may then choose to opt out, if they wish.
Employees can opt-out?
Yes, and there's a deadline on it
Generally, the employee has 1 month from the date they were officially confirmed as an active member of the pension scheme to opt out.
How do they tell you?
They have to give you valid opt-out notice for this intention to take effect.
(The opt-out notice is generally only available from the pension provider as a safeguard for the employee, evidencing that the intention to opt-out is genuine and freely made action, i.e. no employer has persuaded them to do so in order to save money.)
What if the contribution has already been taken from their salary?
A. If an employee opts out in the 1-month time frame:
they're entitled to the refund of any pension contributions so far made
minus any tax due on those contributions (since the pension contribution is entitled to be made tax-free).
Employers are also entitled to the appropriate refund of their contributions.
B. If the employee opts out later on:
- they're always free to do so
- but the rules of the scheme will dictate what happens to payments already made and
- usually, these contributions will not be refunded
- a pension to the value of the contributions already made will continue in place in the employee’s name, in spite of no further contributions.
What's the effect of an opt-out?
If actioned during this time frame, the employee will be treated as though they never were a member of the auto-enrolment scheme.
This status quo remains the case for a 3-year period.
After 3 years, auto-enrolment must once again be offered to the employee, unless the employee once again confirms that they don't wish to be included.
If non-eligible job-holders ask you to, they must also be enrolled
While eligible jobholders are automatically enrolled, you must also enrol non-eligible jobholders into the scheme if they ask you to do so.
Sole directors of businesses with no other employees do not have to undertake auto-enrolment. However, at the point where your business takes on a second worker, this exemption expires; you’ll then need to apply the auto-enrolment to both employees.
How, and how much, you need to pay
What you pay
How much is paid gets calculated based on the employee’s qualifying earnings.
There is a minimum threshold....
below which earnings are not counted
up to a maximum threshold
above which no further obligations are imposed on the employee or you, as the employer.
This usually means...
...the total earnings between £5,876 and £45,000 a year, before tax.
• overtime and
• statutory sick, maternity, paternity and adoption pay.
Currently, both you as the employer and your eligible employee each need to pay a minimum percentage of the worker's qualifying earnings into the workplace pension scheme.
In the worker’s case, this minimum amount (and any worker-requested increase) can be taken from their eligible earnings.
As their employer, you need to pay an additional minimum percentage contribution on top of this.
This minimum level is set to increase substantially for both employers and workers over the next few years.
Find out more about this here.
How you pay
You pay by deducting the contributions from your employee’s pay every month.
You then pay these contributions into the pension scheme by a deadline date that you agree with your chosen pension provider.
Timing of the payment
If the payment is late or not the correct amount, you can be fined, so it’s important to read the terms of your pension scheme thoroughly and to ensure that you have robust systems in place to deliver the payment on time.
Often, this payment can be automated.
Many HR and accounting service providers now include this as part of their service, which can be an efficient and reliable means of de-risking the process.
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