Important changes in the 2008 Pensions Act

Pensions Act 2008 and Personal Accounts

 

Important Information that affects your Business

 

There have been several major changes in the field of pensions brought about by the 2008 Pension Act. The most significant of these changes however, is a new compulsory pension scheme.

 

The main provisions of the Act form the centrepiece of the Government’s attempt to make saving for retirement the norm and extend pension coverage. We have seen several changes to pensions and legislation over the years such as Stakeholder provision etc. but the latest change is the most far reaching and onerous for employers.

 

In order to provide you with an idea of what is currently proposed and the likely affect of those proposals, we have detailed the main points.

 

What are Personal Accounts?

 

Personal Accounts are a new centralised pension scheme to be introduced from October 2012. They are intended as a pension vehicle for lower earners who do not have access to a good company scheme.

 

Who is affected?

 

Employers must automatically enrol all “Job Holders” (any one at least 22 and not over State Pension age, with earnings of over £5,035 p.a.) into a “qualifying scheme”.  If they do not have one, the new Personal Account Scheme, which is being established under an Act, will apply by default. 

 

Are all employers affected?

 

There is to be no small company exemption. The auto-enrolment requirement is mandatory for all employers. Job holders can opt out of the pension scheme after being auto-enrolled, however. In this case, they will then have to be re-enrolled by the employer at 3-year intervals, although they will also have the option to opt out again. Employers are not allowed to discriminate on the grounds of membership, nor can they induce job holders to opt out. If an employer runs their own “qualifying scheme”, it must operate auto-enrolment. Employers are also required to provide information to the Pension Regulator on how they are complying with their duties.

 

What are the cost implications?

 

There is to be a minimum employer contribution of 3% of “qualifying earnings” (£5,035 - £33,540 in current terms), with a total of 8% of qualifying earnings being made (minimum 3% employer, 4% employee and 1% tax relief) via a “direct payment arrangement” for passing on of member contributions.  It is possible that a “qualifying scheme” may be able to use a different definition for “qualifying earnings” but this has yet to be confirmed. Contributions are being phased in over a 3 year period with the initial level being a minimum employer contribution of 1%, with a total of 2% of qualifying earnings. This increases to 2% employer and 5% in total in 2013, then 3% employer and 8%  in total in 2014.

 

Restrictions

 

Contributions will be based upon earnings between £5,035 and £33,540 and be limited to a maximum of £3,600 per annum (in current terms). Transfers to or from the scheme will not be allowed.

 

What action do I need to take?

 

Employers need to begin budgeting to allow for the increased costs. This will depend upon whether you already run some form of pension provision or not. If you already offer a pension scheme, you will need to look at whether the scheme meets the requirements to be a “qualifying scheme”. If you have no pension provisions, you should consider whether you wish to arrange your own qualifying scheme or rely on the default Personal Account scheme, which is proposed to be in place for October 2012.

 

As you will see from the above, the proposals are likely to have a major affect on you as an employer, both initially and on an ongoing basis. There is a distinct need for this issue to be addressed sooner rather than later. Whilst the finer points of the proposals are still to be finalised, it is possible to look at the options available and the financial implications. 

 

We propose to keep you updated as matters progress and are finalised. If you should wish to discuss how Personal Accounts might affect you and your business however, please feel free to contact us.

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