What have I missed about auto enrolment?
Yesterday I suggested that auto enrolment was not really about pensions, that’s because despite it being about setting up a pension, the real emphasis is much more about communications with staff and with Government agencies. The new system is rather like PAYE, though nothing quite as simple. I have come up with 11, that’s eleven, key issues where auto enrolment will challenge your business or charity.
Contracts of employment will need to be altered reflecting the new pension arrangements; this may be a difficult discussion depending upon your type of business and workforce. Do you need to get the help of HR or even legal advice to do this properly?
Pay reviews and salary sacrifice
Some employers may use this as an opportunity to consider “salary sacrifice” or “salary exchange” this is a bizarre scenario where having a reduced gross income with the reduction paid into a pension, saves both employer and employee national insurance contributions and PAYE, yet invariably the net pay is a bit more, with more money going into a pension. Odd but true.
Payroll integration, live and up to date
Your payroll software will need to be able to integrate the new scheme, if you are a small firm and outsource this to your book keeper or Accountant; they need to be up to speed and have software that does the job.
Schemes will be managed online and the Pension Regulator may demand data going back 6 years in a format that they can readily use). This therefore has implications for your IT systems and security and in particular how you hold and backup your data about staff.
Garbage in, garbage out?
Communication with staff is also a big deal. You need to be able to evidence that you have provided all of the relevant information to your staff, email is the most obvious and cheapest delivery option, but we all know that not everyone uses email or has provided you with an up to date email address, so do you need everyone in the business to have a company email address, and what happens when they leave? Do you maintain records properly?
As a pension is an investment, there are issues about possible Money Laundering and politically exposed people. As an employer do you have evidence that you have done thorough identity and residency checks? Can you prove this? This will also identify any illegal immigrants or visa’s that have expired.
Staying silent and impartial
You might see auto enrolment as a valuable part of your staff package, however some see it as another tax and a whole lot of bureaucracy. You are not permitted to give advice about pensions or entice or discourage staff from joining the scheme. This isn’t just frowned on, it carries hefty financial penalties if revealed.
Non compliance with the rules is a dangerous approach. You may believe that you know your staff, but perhaps you should reflect on what could go wrong for you if a member of staff falls out with you, or is just plain awkward anyway (these people do exist in 2014) so make sure you have complied and that you can demonstrate that you have done so. It is pointless to ask for a bullet proof vest after the event.
You may not be aware that some people have very large pension scheme benefits. The Lifetime Allowance has reduced and will reduce again in April. Some people have protected their larger allowances, but should they accidentally enrol into a new pension, this would scupper their plans. This could trigger enormous tax penalties (55% of £1m for example) and you won’t be terribly popular with the employee that is presented with such a bill because you didn’t communicate well enough.
The cynic in me might suggest that this is another way to join-up the Government agencies, which is fine if you are doing everything properly (unless you have concerns about information flow) but of course will catch out more people that have undeclared earnings anywhere.
Impacting your budgeting
Finally, don’t rely on your costs being 3% of your payroll. It is likely that contributions levels will be raised above 8%, in Australia (where they have had compulsory pensions since 1992) employers now contribute 9.25%. You ought to allow funds for the scheme and your systems to be reviewed and of course you might be wise to provide seminars or meetings for your staff to ensure that they understand their pension.
So, auto enrolment is about pensions… well yes, but it is also about rather more besides.
Dominic Thomas: Solomons IFA
What is the best way to save for retirement? Part 7 /7
Ok, this is the last part in the current series and rather than fill you with more information about planning a pension, lets start with what its really all about – your lifestyle. Any decent financial planning should (it’s a requirement, but you would never believe how few “advisers” mess this but up) begin by outlining your current spending. This is an exercise that hardly anyone likes doing, I think because it reveals who we currently are and have been and often this can leave us feeling somewhat disappointed or uneasy about our own “maturity”.
So, lets begin. Running your home – each month what does it cost? That’s mortgage/rent, insurance, council tax, utilities bills etc. Then lets turn to your living costs, that’s food, clothing, haircuts, dry cleaning etc. OK, so now how much does it cost you to run your car/s, commute, use the bus? Next healthcare – medicines, opticians, dental, then how about presents (Christmas, birthdays, weddings) and charitable giving. Finally, how much do you really spend on holidays, your hobbies and entertainment generally? These are all pretty much your lifestyle costs… but we aren’t done yet… and if you have children how much does childcare/schooling cost you?
Current financial stuff
Financial costs – how much are you paying to debt and loans? What are the balances, current rates and when do they end? How about your savings, investments and pensions? What are you currently putting away each month? What are the balances? Any financial protection (life assurance, income protection, critical illness cover? Cost and cover?).
So lets make an assumption or two – but please adapt this for your circumstances. When do you want to have the option of working? In other words you don’t need to earn money to pay for your lifestyle? Pause on this. It isn’t the same question as “when do you want to retire?”. So, lets assume (adapt) that your children if you have had them have left home, your mortgage is repaid and you don’t have a need for ongoing financial products (you might, but just go with it). So what does your lifestyle cost (this is a net – after tax figure for the year or month). Is there anything else? When you reach this point you will have more “spare time” to do the things you’ve been working hard for… so what are they? Extra travelling? that “bucket list”… what?… so what is your required income? When?
Let’s assume the State pension is still viable then, so knock off £5,200 (£100 a week) from the figure. What does that leave? OK, calculator ready? Quick rule of thumb… divide this by 4% to reveal the fund you need IN TODAY’S MONEY (not the same as the money you need today). Example: £20,000 /4% = £500,000. This is a rough estimate. We then need to figure out what this number would be (your number) when you want to stop working. So we really need to do all the sums and pull all the information together about what you have already. This is basic financial advice or as our American friends say “Financial Advice 101”.
This is usually where you need a financial planner to help pull apart your assumptions, explain what you really have and importantly explain what you can do to get on track and what returns you need. Want help? Call me. if you want more flesh on the bone, you might want to buy a book called “The Number” by Lee Eisenberg.
Dominic Thomas: Solomons IFA