Last week, QuickBooks’ Pauline Green went through some of the things you’ll need to consider when selecting a pension provider (If you missed, check it out here). Now, she continues her suggestions for what you’ll have to focus on when going through this important process.
Where can you get independent advice?
There are lots of places to find help, but there might be a fee involved. In fact, some advice may appear to be free initially, but it is offset against the annual costs charged by the pension provider. These annual costs could also include a percentage paid to the advisor. It will be essential that you check how all of the costs are calculated.
List of places to find independent advice
- IFA’s – Independent Financial Advisors – Be warned: advice here could cost up to £5,000
- Some websites will help to select a pension that is right for you and your employees (like an on-line IFA).
- Accountants – they usually will not help you select a pension provider although they could help you with costing. For example, some pension schemes may have set-up costs, annual charges and on-going admin fees
- NEST is the pension provider who has a legal obligation to accept all employers and employees no matter what the circumstances are
What are the set-up details?
Once you have selected your pension scheme, you’ll need to set-it up with the pension provider. You will need to provider your employee’s details, including contact details. Some pension providers will also help with communications that you need to send to your employees.
Also part of the pension set-up will include deciding what the contribution levels are and what type of fund the contributions should be invested in.
How do I decide the contribution levels and fund type?
For contribution levels you can decide to use the minimum statutory levels. For now the absolute minimum is 1% for the employee & 1% for you the employer but remember these will be increasing 1 October 2017 and again in 2018.
Some Pension Providers will also use “thresholds”. The thresholds for 2015-16 are between £5,824 and £42,385 (these are the annual rates). This means that the pension contribution is calculated between these levels so reducing the value of the contribution from both the employee and employer. Remember: the lower the contributions the lower the pension the employee will receive.
You will also need to decide which payroll elements will be subject to the pension contribution. This is known as “pensionable earnings”. You will decide with the Pension provider what the “pensionable earnings” will be. You could select just “salary” or you could include items such as “bonus” & “commission”.
With the fund type the pension provider will be able to help you choose. They will all have a “default” pension fund which is where the majority of pension schemes usually end up as.
To encourage employees to save into the pension the government gives tax relief on the pension contribution. There are 2 methods an employee receives tax relief on their pension contribution.
- net pay
- relief at source
The contribution is taken from the pay before it’s taxed. You only pay tax on what’s left. This means the employee gets full tax relief, no matter what rate of tax is paid (e.g. basic, higher or additional rate.)
The Net Pay arrangement is only for schemes which have been registered with HMRC.
‘Relief at source’
The pension contribution is deducted after taking tax and National Insurance is taken from the pay. The pension provider then adds tax relief to your pension pot at the basic rate (currently 20%). The employee may be able to claim money back if they pay higher or additional rate Income Tax.
Some pension providers include the tax relief in the calculation to meet the minimum requirements e.g. you deduct 0.8% and the pension provider adds 20% tax relief to meet the minimum requirement of 1%
Other pension providers add the tax relief after the calculation e.g. 1% is deducted and 20% tax relief is added later so the pension pot is more
Check with the Pension Provider to see which tax relief basis their scheme uses.
Checking your payroll
Good payroll software, like QuickBooks will enable you to select items such as “threshold” so the pension contribution is calculated only between these thresholds
Also you will be able to select “pensionable items” so you can identify which payroll items should be used to calculate the pension contributions.
Your payroll software should also be able to calculate the correct tax relief so that the correct pension contribution and tax relief is taken.
Already have a pension scheme?
If you already have a pension scheme you need to check that it is a “qualifying” scheme. The Pensions regulator recommends the following checks:
- Check with the provider if it can be used for automatic enrolment.
- Even if it is a stakeholder pension scheme it may still be used for auto enrolment if the provider allows it
- If it is a defined benefit (DB) or hybrid scheme you need to speak to the scheme trustees
- If it is a defined contribution (DC) scheme then use The Pensions Regulator tool to check if it is also a qualifying scheme: