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How to set up a workplace pension
Business advice

How to set up a workplace pension

17 May 2021

5 min read

While there’s a lot to be said for ‘living in the moment’, we all need to save towards our retirement – and that’s where workplace pensions come in. But what are your obligations as an employer in relation to pension contributions? Here, we take a look at what workplace pension law means for your business.

What is a workplace pension?

A workplace pension is a scheme set up by an organisation that allows their employees to access benefits in retirement, such as an income, a tax-free lump sum or a combination of both.

When did workplace pensions start?

Since 2018, all employers have had to automatically enrol their eligible employees onto a workplace pension and make contributions towards it. The Pensions Act 2008 first outlined this requirement, and automatic enrolment – which we’ll cover in more detail later – was phased in from 2012 onwards. But pension schemes have been around in the UK since the Old Age Pensions Act in 1908 , with National Insurance introduced shortly after in 1911.

How does a workplace pension work?

As an employer, you’re legally obliged to provide a workplace pension, and you must ‘automatically enrol’ employees onto the scheme if they are eligible. Workplace pensions are compulsory for the following staff members (if all the below criteria apply):

  • They’re classed as a worker
  • They’re aged between 22 and the State Pension age
  • They earn £10,000 per year or more
  • They’re ordinarily UK-based for their work
  • They’re not part of another workplace pension.

When you set up a workplace pension, a percentage of your employees’ earnings will be paid into their scheme on payday. This must be a minimum of 3% of your employees’ ‘qualifying earnings’, which, depending on your pension scheme, could include salary or wages, bonuses and commission, statutory sick pay and overtime. Your payroll employees will be able to see the workplace pension contributions on their payslip alongside deductions like Income Tax, National Insurance and student loan contributions if applicable.

Workplace pension exceptions

As an employer, auto-enrolling your staff onto a workplace pension is not mandatory if the following apply:

  • Your employee has handed in their notice, or you’ve given them their notice.
  • They’re from an EU member state and are part of a cross-border EU pension scheme.
  • They’re part of a limited liability partnership.

There are other situations where workplace pension exceptions apply – for full details read more on GOV.UK.

Types of workplace pension scheme

There are different types of workplace pension schemes that employers may want to familiarise themselves with. The first type is an occupational pension, which is set up directly by employers, rather than an external pension provider. An example of this is a ‘final salary scheme’ where pension contributions are linked to a worker’s salary at retirement and their years of service – though these pensions are increasingly rare.

Another example of an occupational pension is a ‘money purchase scheme’, where pension contributions are based on the performance of a pension fund’s investments ; the objective is to increase each employee’s pension pot when they retire. With this type of pension, the payout is based on the amount of money paid in – a set amount from each employee’s salary – as well as the success (or otherwise) of the investments.

The second main type of workplace pension is a group personal pension – sometimes simply referred to as a workplace pension – where the employer sets up the scheme with a pension provider, but the contract is between the employee as an individual and the provider . A group stakeholder pension is a similar concept to a group personal pension, though some rules may differ; for example, the former may have lower contribution amounts and charges, but potentially (though not always) lower growth.

How to set up a pension scheme

Here is a step-by-step guide to setting up a pension scheme for your company.

  1. Check that you’re classed as an employer.
  2. Make a note of your ‘duties start date’ – this is the first date you hired someone, and from this point you have six weeks to set up a pension scheme, otherwise you will need to backdate pension contributions or risk getting fined .
  3. Check which of your staff are eligible. You may need to assess which staff should be on the scheme based on factors like their age and work status.
  4. Choose a pension scheme. You may want to consider factors such as whether the scheme is compatible with your payroll, how much it costs, and any tax relief advantages. If you don’t wish to find a pension scheme yourself, you may be able to get help from a financial adviser.
  5. Write to your staff to inform them of whether they are or aren’t being placed onto a workplace pension scheme, the percentage of the contribution if applicable, and any tax relief they’re entitled to .
  6. Start paying pension contributions each time your eligible staff members are paid.
  7. Complete a declaration of compliance with the Pensions Regulator – by law, this must be submitted within five months of your duties start date .

For more guidance and resources on setting up a workplace pension scheme, visit The Pensions Regulator website.

Read more from the Tyl team

Once you’ve got the ball rolling and set up a pension scheme, why not head over to Tyl Talks? We’ve got plenty of articles and guides to help you with running a business.

Disclaimer

This has been prepared by Tyl by NatWest for informational purposes only and should not be treated as advice or a recommendation. There may be other considerations relevant to you and your business so you should undertake your own independent research.

Tyl by NatWest makes no representation, warranty, undertaking or assurance (express or implied) with respect to the adequacy, accuracy, completeness, or reasonableness of the information provided.

Tyl by NatWest accepts no liability for any direct, indirect, or consequential losses (in contract, tort or otherwise) arising from the use of the information contained herein. However, this shall not restrict, exclude, or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not be lawfully disclaimed.

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