Workplace Pensions

With our country sitting on the biggest pile of debt we have ever had, the Government is looking for ways to save money, and will be for decades to come.  The consequences are profound and will change our relationship with the State in many ways. One of them is the transfer of responsibility for providing for one’s old age from the State to the individual (and their employer). This includes workplace pensions.

State pensions are diminishing and the pension age will rise to 67 from 2026, thereafter it will be linked to life expectancy rates and reviewed every 5 years.  In addition it has been simplified to a new single-tier rate of £155.65 a week, which cancels out any benefit of paying higher National Insurance contributions.  In theory this is available to anyone with 35 qualifying years, but it is apparent from the details that many people retiring will not meet the criteria.

For landowners, farmers and other rural businesses the biggest impact has been “Auto-Enrolment”. This is the employers’ new obligation for providing workplace pensions for their employees.  If you employ someone who is aged between 22 and 67 and pay them more than £10,000 pa you must automatically enrol them into a qualifying workplace pension scheme. Workers can opt-out of joining a pension, but employers must automatically re-enrol them every three years. Also an employee aged 16 to 74 earning between £5,832 and £10,000 must be provided with a qualifying pension should they wish to opt in. This applies to seasonal workers just as much as regular employees.

An existing scheme may not necessarily qualify as an auto-enrolment pension so the choice for employers is between a private scheme provided by one of the life companies facilitated by a financial adviser, and the Governments’ free ‘catch-all’ scheme – NEST (National Employment Savings Trust). Failure to comply means a fixed penalty of £400, with further fines of up to £5,000 for individuals and £50,000 for organisations.

The Government has tempered the impact by keeping minimum contributions very low at 2% initially (with the Employer putting in 1% and Employee 1% of salary) rising to 8% from 2019 (with the Employer at 3% and the Employee at 5%). A married 30 year-old earning £18,000 pa and saving 8% into a pension will have a retirement income of £3,818 pa at age 65, so it is important to remember that the 8% figure is designed to be manageable rather than be any “rule-of-thumb” figure to use in order to provide a meaningful retirement income.

This article was first published in “LandBusiness” – a quarterly publication from Scottish Land and Estates in the Spring 2016 issue.  The value of your investments that pensions are invested in can go down as well as up.