The ever-changing world of pensions - for employees, employers and business owners
With the pensions landscape changing more rapidly than ever before, we thought it would be worth putting some of the current burning questions around all of that to our very own Russell Davidson, Managing Director of DAM.
Here is his expert advice on some of pensions queries you might have running around your head either as an employer or employee.
We seem to be seeing significant changes on pensions legislation at the moment - why is this happening? There are 3 main reasons. First, the good news. We are all living longer so we need more money to see us through our dotage. Second, the number of workers paying National Insurance contributions is dropping rapidly in relation to the number of pensioners. That means that the State pension system is heading for a fall unless changes are made. Third, and this is where it can get slightly political, the Chancellor has his eye on the tax breaks enjoyed by pension savers and most people suspect he wants to increase tax revenue from this area while still encouraging all of us to save for our future.
Which is why every day, there is something in the press and media about pensions (this interview included!).
How are employers and business owners coping with the changes? It’s pretty mixed. Overall, UK businesses have just about coped with the Workplace Pensions legislation that has forced UK employers to set up a pension scheme for their employees. About 70,000 business have now set up a scheme but there are still over one million smaller companies to auto enrol. Smaller companies don’t tend to have an HR or Finance director to handle this so the strain is bound to be greater.
That said, employees have responded amazingly well to their new pension schemes. The government’s original estimates were that up to 30% of eligible employees would opt out. The actual number has been around 10%. I think people actually ‘get it’. They understand that the State won’t be there to look after them to the same degree as it was for their grandparents and they are acting to build savings themselves.
What are good employers doing that we could learn from? Starting early. If I had a pound for every business owner or director who has said “I wish I had begun looking at this sooner” I would have £524 (yes, I counted them!).
Also I would get my head round the scale of the challenge. Find a pension provider willing to take on my company (many will say no), decide if I can afford to pay any more in addition to the basic minimum, figure out if my payroll solution is up to the task of managing my calculations on every payroll run and deciding how I will communicate what is happening to my staff. I’ve mentioned four big ticket questions but there are many others depending on your specific circumstances. Then you need to make choices. Do I do the work myself or do I go find help?
What does this mean for businesses who take on lots of seasonal workers? More work! However there are a couple of things businesses can do to make it simpler. Postponement allows companies to defer the date they bring employees into their scheme for up to three months. For seasonal workers, this might remove them from the equation altogether. It is also important to remember that only employees who are aged between 22 and State Pension Age and earn over £10,000 per annum (about £192 per week) have to be auto enrolled.
I’d still suggest that a business owner talk this through with their accountant, payroll bureau or financial adviser before making any concrete plans.
Do you anticipate further changes? It’s pensions. Its political. It involves billions of pounds. Yes, we anticipate government tinkering for many years to come. The budget on March 16th is widely expected to bring more reform. Even people like myself who have been involved in pensions for decades still find it a challenge to keep ahead of the developments. But with change also comes opportunity for people to build significant savings pots and access them in more user-friendly ways. Overall I am optimistic that the next generations will be better prepared for life after work.