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Millions may miss out on pension pay out

Posted on: 12th Oct 2017 by: CamOuse Financial Management Limited

A recent study by the Pensions and Lifetime Savings Association (PLSA) has suggested that people who have saved into defined benefit (DB) pension schemes have only a 50/50 chance of receiving the payouts they are expecting, resulting in millions missing out on the retirement income promised to them. The pressure on some employers to meet their pension obligations has increased significantly, with well-publicised cases of pension collapse including that of BHS once again highlighting the concerns surrounding the future of workplace pensions.

The PLSA looked at the DB pension schemes of 11 million people across the UK. Whilst most pensions are reliant on successful investment, DB schemes promise a specified level of income during retirement dependent on factors such as the member’s final salary. The PLSA found that the majority of these schemes had sustainable models to ensure future payments could be made, but also identified three million schemes which might not be able to guarantee the future payments for its members.

However, the PLSA has also suggested pension “superfunds” as a solution, where struggling companies pool their resources together. The companies would pay a set fee, allowing them to transfer their defined benefit schemes such as final-salary pensions into a wider fund. This would then provide greater investment opportunities for the future. Whilst a standard deal for members of these schemes means that some could end up with a better final payout than expected, the pension income for others would be reduced as a result.

In response to the PLSA’s findings, the Department for Work and Pension stated: “Most pension schemes are operating well and the vast majority of members can expect to receive their benefits in full. But in the wake of several high profile cases, there may be more that needs to be done to support the sector. As we look at options such as the consolidation of pension schemes, we will continue to work with the industry, employers and scheme members to see what more can be done to increase confidence in defined benefit pensions.”

The PLSA’s superfund suggestion has been criticised by some in the pensions sector, suggesting that the body is attempting to undermine the safeguards which have been available for savers since the 2004 Pensions Act.


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CamOuse Financial Management is authorised and regulated by the Financial Conduct Authority.

None of the information contained in this website should be considered as personal recommendation and is for information only. Should you wish to make a financial transaction we recommend that you take personal financial advice after a thorough review of your personal and financial circumstances.

The information contained within the website is subject to the UK regulatory regime and is therefore primarily targets at customers in the UK.

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Understanding the true cost to your business

Pension arrangements must be available for all employees. There are three categories of employee:

Eligible

Aged between 22 and State Pension Age (SPA) with qualifying earnings over the Auto Enrolment earnings trigger

Non-eligible

Aged between 16 – 74 with qualifying earnings between lower threshold and the Auto Enrolment earnings trigger
 
Aged between 16 -21 or SPA – 74 with qualifying earnings over Auto Enrolment earnings threshold

Entitled

Aged between 16 -74 with earnings below the qualifying earnings lower threshold

Important Notes

  1. Eligible jobholders must be auto-enrolled
  2. Non-eligible jobholders are allowed to be auto-enrolled if they want to
  3. Entitled workers are entitled to join a pension scheme, but the employer doesn't have to contribute

Qualifying Earnings lower threshold

£5,772

Qualifying Earnings upper threshold

£41,865

Automatic Enrolment earnings trigger

£10,000

Minimum contribution level options:

8% of Qualifying Earnings of which

3% is employer's (starting at 1%)

9% of Basic Salary of which

4% is employer's (starting at 2%)

8% of Basic Salary of which

3% is employer's (starting at 1%)

(Where basic salary is at least 85% of total earnings)

7% of gross earnings of which

3% is employer's (starting at 1%)

Pay reference period

Essentially the frequency that the jobholder is paid e.g. monthly, weekly etc. but with reference to the tax month, week etc. therefore it may not be the same as the payroll period.

Deduction and payment of contributions

It is the employer who is responsible to calculate, deduct and pay all contributions to the AE scheme. NOTE – the first and last contributions are likely to be for less than a full pay reference period and should be adjusted accordingly.

Payroll services

It can be seen that it is very important that the payroll system synchronises with the AE scheme otherwise the employer will not be carrying out all requirements and then penalties will be incurred.

Staging date

Based on the employer’s payroll size as at 1 April 2012 and can be found at www.thepensionsregulator.gov.uk/employers using your PAYE reference. The Qualifying Workplace Pension Scheme must be registered with The Pensions Regulator within 4 months of the staging date.

Compliance and communication

Postponement

Auto-Enrolment can be postponed for up to 3 months:

  • For current eligible employees
  • For workers that meet the criteria in the future for the first time e.g. avoid joining temporary or lower paid workers

Opt-Outs

All eligible employees must be auto-enrolled, but can, with the correct notification, opt-out within one month of joining the scheme and be treated as never having joined. They can opt back in and will automatically be auto-enrolled every 3 years in any case!

Communication

There is a wide range of information that must be provided to all employees at certain times, such as:

  • The date auto-enrolment took place for eligible jobholders
  • That non-eligible jobholders have the statutory right to opt in
  • Entitled workers have the right to request the employer to enrol them into a pension scheme

Salary sacrifice

Contributions can be paid by effectively reducing salary, which saves on NI contributions, but employee must choose to do this – they cannot be forced, so a contractual variation will need to be implemented.

Default investment fund

Investment Options

All eligible employees will be automatically invested into a default investment fund, which is a balanced risk fund that is “life styled” to account for the employees approach to retirement. They also have the option to invest in a wide range of funds of their choosing.