Robin Bates, Chartered Financial Planner, Bulley Davey Wealth Management Ltd, offers a guide to avoid the pitfalls...
Life is often tough for small business owners. Little do you realise when starting out on your own that you must simultaneously become an HR expert, accountant, leadership guru, marketing consultant and customer service specialist. And, since the introduction of auto-enrolment in 2012, you now need to be a pensions expert, too.
Auto-enrolment was introduced in 2012 because 11.7 million British workers had no pension in place. With average lifespans ever increasing – and even claims that some born today will live to 150 – people need to seriously consider how they will support themselves in retirement.
Auto-enrolment means that every eligible worker is given a pension scheme and must actively opt out if they don’t want one. Great for the individual, but for a small business, the burden of implementing the new approach can be substantial.
Not only is there the pressure to find a reputable advisor and suitable pension scheme, you must then build appropriate processes around it. The business must also communicate the plan to each employee – without offering advice – so they can decide independently whether to opt in if they are not eligible to be auto-enrolled or opt out if they are.
The trouble is that this is an unregulated industry. The pensions themselves are overseen by the Pensions Regulator, but currently anyone can set themselves up as an auto-enrolment advisor. Clearly this is a lucrative place to be at the moment, with so-called professionals now prolific, along with websites that claim to offer a complete auto-enrolment solution, stress-free.
Unfortunately, choosing the wrong advisor has already cost some companies dearly. One business with 200 employees initially approached its bank for pension support but then, believing this approach to be too expensive, took the decision to manage the implementation in-house. It auto-enrolled all its employees regardless of whether they were eligible or not. All employees were also unknowingly given double tax relief on pension payments. As you might expect, both of these practices are illegal.
Recognising that they were out of their depth, the business approached us for support. The cost to rectify the problem cost more than £8,000, with a further £4,000 in unpaid income tax. Done right, the scheme should have cost around £3,000.
Another business approached a local advisor to help them implement their pension scheme. The advisor helpfully took over the entire set-up. Unfortunately the company then had no view and offered no ongoing advice on running the scheme, the contributions being made, or any detail as to what was in place. Again nothing had been communicated to employees. When questioned, the advisor confessed that he couldn’t help any further. In the end, the firm turned to us to cancel what was in place and start the whole process again.
Will micros manage?
So we are already seeing some fallout among the thousands of businesses that are already signed up to auto-enrolment. But the real concern is for the micro employers who are signing up as we speak. Staging dates for businesses with fewer than 30 employees began this summer and will stretch out until April 2017.
The biggest threat to any business from auto-enrolment is that mistakes are made.
Ensuring roll-out success
Many businesses have successfully implemented their auto-enrolment pensions, by sticking to five basic guidelines.
1. Make time to do it right. Start the process at least six months before your staging date.
2. Choose your advisor wisely. Find a reputable, independent financial advisor that has a proven track record in successfully supporting pension roll-out. Their expertise will help you avoid the pitfalls and errors that could expose you to employee claims or industry fines.
3. Take ownership. Work alongside your advisor throughout the process. Your aim should be for them to help you set up the scheme and do the ongoing management of it in-house.
4. Give fair warning. Make sure that you give all employees at least three months’ notice before the launch of the scheme. You are not allowed to encourage your people to opt out, and all eligible employees must be auto-enrolled by their first pay date after the scheme launches unless you have postponed contributions.
5. Demonstrate the benefits. A decent pension scheme is seen by employees to be a valuable benefit, and if your company takes the opportunity to contribute to each employee’s scheme too, it could prove to be a great staff retention tool.
The final step is communication. Don’t send a dull, impersonal 10-page letter; hold a special meeting and bring the value of a pension to life for each employee. Demonstrate that you care about your people’s future and that you value every member of your team. This is something that a small business is uniquely placed to do – make the most of it.
Robin has worked in financial services for 27 years, building up a widespread knowledge of all aspects of financial planning. Robin is also a Chartered Financial Planner – a title given to about 10 per cent of financial advisors in the UK. In particular he enjoys working on wealth preservation, estate planning and investments.
Key facts about auto-enrolment
· Any organisation employing one person or more is now legally required to provide auto-enrolment pensions
· This also applies to staff in the home, such as nannies or carers
· Auto-enrolment applies to any employees who are:
- Aged 22 or over
- Under State Pension age
- Earning more than £8,105 a year
- Working or usually working in the UK
- Not already in a qualifying pension scheme.
Non-eligible workers can ask to be enrolled into your scheme and if they do, you must pay minimum contributions. These are UK workers who are either:
- Aged 16-22 or state pension age to 74 and earn more than £10,000 in a year, or
- Are aged between 16 and 74 and earn at least £5,824 but less than £10,000.
- Entitled workers can also ask to join, although you don’t have to pay contributions for this group. Entitled workers are those aged 16-75 who earn less than £5,824.