Workplace pension schemes
Workplace pension schemes for your small business
What is a workplace pension?
A workplace pension is a scheme that employers are legally obliged to offer their employees to help them save for their retirement.
As an employer, you must automatically enrol any eligible employees into a workplace pension scheme and contribute at least a minimum amount towards it.
Current rules set by GOV.UK state the total minimum contribution is 8%, with at least 3% coming from the employer.
There are two main types of workplace pension schemes:
Defined contribution schemes
These are schemes where the money is paid in by both the employer and the employee’s contributions and then invested by a pension provider. The value of the pay-out can therefore rise or fall depending on how the investment performs.
Defined benefit schemes
also known as final salary schemes, these pay out a fixed amount depending on how long an employee has worked for you and how much they earned. However, they are a high-risk and expensive option for employers, which is why most are now closed to new members.
As an employer, you must automatically enrol any eligible employees into a workplace pension scheme and contribute towards it"
Is it a legal requirement to provide a workplace pension?
Yes, both big companies and small and medium-sized enterprises (SMEs) must provide workplace pensions for their employees. And even businesses with just one employee are classed as employers.
Your legal duty to provide a workplace pension scheme starts on the day you first employ one or more people; failing to meet this duty could result in a fine of up to £10,000 a day, as well as a criminal conviction that could land you behind bars.
Should you opt for a government-backed provider?
If you don’t employ many people, you may find it easier to use the government-backed National Employment Savings Trust (NEST) scheme. It’s free, easy to set up, and available to all, while the government involvement also makes it a low-risk choice.
However, private pension providers offer similar options that may be better suited to your employees’ needs. Ensure the provider is regulated by the Financial Conduct Authority (FCA) and covered by the Financial Services Compensation Scheme (FSCS), so employees can get compensation should it go bust.
Larger organisations, meanwhile, may prefer to maintain greater control by appointing a trust to run a pension scheme specifically for their employees. Further information on trust-based schemes can be found in the Pension Regulator toolkit.
Whatever route you take, it’s worth consulting an independent financial adviser or accountant to make sure you choose the best workplace pension for your company.
It’s worth consulting an independent financial adviser to make sure you choose the best workplace pension for your company"
Things to consider when choosing a workplace pension scheme for your business
Some schemes, such as NEST, are free of charge for the employer. Others involve paying a monthly fee, which may be linked to the number of employees concerned. Using a professional payroll bureau can earn you a discount with some providers.
Employee costs such as annual management fees will depend on both your choice of pension scheme and the underlying investment fund.
Choose a scheme that is easy to set up and integrates easily with your existing payroll will make the process much simpler. Looking for one that can be managed online will help with this.
A self-service website makes it easier for employees to manage their pension savings, while an app and educational resources can help to encourage them to save more. It’s also worth choosing a provider that allows free transfers in, enabling employees to keep all their pension savings in one place.
Features such as salary sacrifice can be attractive for both you and your employees. Look for a scheme that can be customised to the needs of the company and its workforce.
Look for a provider that offers enough choice to cater for a diverse workforce – without getting too complicated. Many auto-enrolment providers offer around five funds for employees to choose between depending on their investment objectives.
Things to consider when choosing a workplace pension scheme for your business
Cost to you
Cost to employees
Set up and maintenance
Member experience
Customisation
Choice
How to set up a workplace pension
Things to bear in mind when setting up a workplace pension:
Choose a scheme
Enrol eligible employees
Inform staff
Set up employer and employee contributions
Tell the Pensions Regulator
You're done
“Providing a workplace pension scheme is a legal requirement so it's crucial that you take the time to weigh up the options out there to find the right scheme for both your business and your employees. Checking the cost to you against the benefit for your employees is a good place to start.”
FAQs
No. Companies with one or more employees are required by law to offer a workplace pension scheme to all employees aged between 22 and the state pension age. So a small business cannot “opt out” of providing a pension – unless it is solely made up of directors who prefer not to have a workplace scheme. However, auto-enrolled employees can choose to “opt out” of the pension scheme within the first month.
Workplace pension schemes allow employees to save for retirement in a tax-efficient way while also benefiting from employer contributions to their pension pot, at a rate of at least 3% of their salary. Offering an attractive workplace pension is therefore one way to recruit and retain talented workers.
If an employee leaves the company, the money in his or her workplace pension pot remains invested, but both the former employee and the employer generally stop paying into the scheme. Those going to new jobs can often choose to transfer their pots to their new employer’s scheme. If nothing is done, the existing pot remains invested until the employee reaches retirement age.
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