Workplace pensions

Workplace pensions

If you haven’t heard the term ”workplace pensions”  or if you have and don’t really comprehend  what they are or mean to you as an employer of perhaps just one domestic staff member… you should read on.

If you employ for example, a nanny, housekeeper, chauffeur, cook or carer, then you will shortly have a legal obligation to enrol them into a workplace pension. The idea is that, upon retirement, your employee will have this pension in addition to their state pension.

So, who is eligible?

Every employee must be automatically enrolled into a workplace pension scheme if they are aged between 22 and state pension age, earn over £9,440 per year, and work in the UK.

There are essentially two different types of pension:

  • a defined contribution pension, one in which the employer’s and employee’s contributions are invested by a pension provider, the end result in terms of pension however can be variable and depends upon the pension provider’s performance.
  • a defined benefit pension, will provide your employee with a fixed amount each year, with that figure dependant upon their salary.

Either way, it will be for you, the employer, to decide which route to take, probably in all fairness, after consultation with your employee.

So how much of the employee’s wage packet has to be invested.  The minimum will be 2%, but this will have to increase to 8% by 2018.  Your employee will pay towards the pension scheme and so will you as the employer.

The government will also add some money in the form of tax relief to those who pay income tax.

When your employee leaves your employment, they can freeze their pension scheme and reclaim the money invested when they reach retirement age.  If they start another workplace pension in their new employment they can however carry on paying into your scheme as well as the new one with their new employer.

Employees can however opt out of a workplace pension scheme if they wish and re-join at a later date.  If they are finding their finances stretched or their situation changes, they can also ask for their contributions to be reduced, albeit only down to the minimum payment level.

Pension schemes are protected to some degree.  If the pension provider ceases trading, it is possible the employee can obtain compensation from the Financial Services Compensation Scheme.

It’s quite a lot to take in, but of course you don’t have to do all the work, merely ensure you have a pension provider on board and follow their advice.  The other reason for understanding all this, is that when you interview a candidate, essentially they can interview you regarding your pension provisions and your understanding of their rights.  As always, it’s better to have the knowledge, and this will give your candidate more confidence in you as an employer.