The government are introducing a new pension scheme that will impact upon every dental practice. Known as ‘auto enrolment’, this new incentive has been designed to help individuals save for their retirement by having them automatically enrolled into a pension scheme by their employer.
This change has been bought about due to a statement from the Department of Work and Pensions (DWP), which said that millions of people in the UK are simply not saving enough of their income to support themselves when they retire. To add to this problem, life expectancy is increasing; which means that the amount of money that is saved has to be spread even further. Further to this, the DWP’s findings concluded that only one in three adults contribute to their pension, this is why the government has decided to bring in the auto enrolment scheme.
The scheme began in October 2012 and it is estimated that more then half a million more people were saving for their pension by Christmas 2012. Projected figures estimate that this number will grow to 4.3 million by May 2015.
Auto enrolment will affect anybody who doesn’t already contribute to a workplace pensions, is aged between 22 and the state pension age and earns more than £8,105 a year (this is to be reviewed each year). However, the chance to save is also open to some employees who won’t be enrolled automatically. As long as that person is earning more than £5,564 a year and is older than 16 they can set up a workplace pension scheme, but despite this their employer will not be expected to contribute towards it.
Technically auto enrolment began at the start of October 2012, though many companies will not have to instigate it for a while, some will even have to wait years; it all depends on the size of the company.
First to enrol were larger companies with employees in excess of 250. The last to enrol will be any employers that were established later than April 2012, who will not be expected to enrol their employees until May 2017 at the very earliest.
Most dental practices will find that they are required to enrol their employees between June 2015 and April 2017 because they will generally have fewer than 49 employees and therefore come under the bracket of ‘small employers’.
Most employees will be enrolled in a ‘defined contribution scheme’, this will mean that both the employee and the employer make contributions to the fund, which is then invested. The total fund available when the employee comes to retire all depends on how much has been paid in and what the performance of the investment has been. If the employee is saving between £5,564 and £42,475 a year the employer has to contribute to the pension. However, if the amount being saved tops £42,475 then it is up to the employer as to how much they contribute. The government will also make a contribution to the pension, this comes in the form of tax relief.
The smallest contribution that can be made is 2% of the employee’s gross annual earnings. This is made up of a 0.8% contribution from the employee, 1% from the employer and 0.2% as tax relief. This will increase to 8% in October 2018 (4% from the employee, 3% from the employer and 1% in tax relief).
Employees can enrol in other types of pensions, such as defined benefit or hybrid schemes. These are different to a defined contribution scheme as the amount that the employee receives upon retiring is dependant upon their earnings and how long the pension has been contributed to. If an employer wishes to use one of these types of scheme their employer will not be required to enrol them until September 2017.
Workplace pensions schemes are not compulsory, so although everyone will eventually be enrolled, employees can opt out. Despite the government’s best efforts to persuade people to save by offering tax relief, it is still estimated that millions will choose to opt out of saving. If an employee wants to opt out they must act quickly, as any savings that have been accumulated for longer than a month will not be released until retirement.
Any employers who are discovered to have not enrolled their staff will face a fixed penalty fine of £400. If they continue to ignore their responsibilities they will begin to receive daily fines that range from £50 for smaller companies, to £10,000 a day for large companies. So it really does pay to ensure that you are on top of auto enrolment. Employers are also warned not to try and sway employees to opt out by offering them incentives such as a higher salary.
By seeking advice from an Independent Financial Adviser (IFA) you can learn more about auto enrolment and how it will affect you and your company. A specialist dental IFA, such as money4dentists, will know exactly how this new legislation will impact upon the dental industry and be able to help you to plan for when your time to enrol comes.