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Pension Changes – Putting you ahead of the game

Over the last 12 months much has been written about changes to pension legislation and the new National Employment Savings Trust (NEST) pension arrangements that will be compulsory on all employers and employees over the next few years.

This document is aimed at clarifying what these changes are and how at ContractorUmbrella we have already put in place a scheme that more than meets the requirements of NEST whilst offering excellent additional benefits both in terms of tax savings and investment options.

Who is required to be in a pension scheme?

From 2012, every employer will have to enroll into a workplace pension those workers who:

  • Are not already in a workplace pension scheme
  • Are at least 22 years old
  • Have not yet reached State Pension Age
  • Earn more than the minimum earnings threshold (£7,475 per annum) and
  • Work or ordinarily work in the UK (under their contract)

The largest employer will start first in 2012 & 2013 with the medium to small employers following between 2013 – 2016.

Opting Out
Employers are under a duty to automatically enrol employees into the pension scheme under the new legislation. An employee can choose to opt out of the scheme but after a period of 3 years, the employer will be under a duty to again automatically enroll the employee in to the scheme unless the employee specifically requests to opt out again and this process will continue every 3 years whilst the employee meets the above qualifying conditions.

Contribution Levels
The government has set out the minimum contributions that will need to be made to the scheme. This minimum increases over the period October 2012 – October 2017 as follows:

Timing Minimum total percentage that has to go into the pension pot
October 2012 to September 2016 2%
October 2016 to September 2017 5%
October 2017 onwards 8%

This minimum pension level can be made up of the employee's contribution, employers contribution and the tax relief added together. The Contractor Umbrella scheme operates under a salary sacrifice basis and therefore the total payment made under this basis must meet the minimum criteria as set out in the table earlier.

The minimum contribution percentages do not apply to your whole earnings but on the amount of earnings over the minimum threshold (£5,035 currently) and below the maximum threshold (£33,540 currently) but these limits will be reviewed annually. For example, an employee earning £50,000 per annum would exceed the upper limit and therefore be liable to contributions to the scheme of 8% (post October 2017) x (£33,540 - £5,035) = £2,280.40 per annum.

Increase the tax efficiency of personal pension contributions
If you are currently making pension payments to a private arrangement outside of Contractor Umbrella's scheme, then you can benefit from the additional tax relief available from salary sacrifice in that no employer or employee national insurance is calculated on the amount paid to the Contractor Umbrella Scheme.

In addition to this, these payments would also count toward the minimum contribution levels which they do not when directed to your own personal pension plan.

Summary
The changes to the legislation reflect the concerns around the low level of pension savings and the fact that in this country we have an aging population that is drawing a state pension.

In 1901 there were 10 people working for every pensioner in the UK. In 2005 there were 4 people working for every pensioner. By 2050 it is expected that this will change to just two workers for every pensioner.

With such a dramatic fall it is inevitable that the state pension will need to be tightly controlled if it is to continue to exist at all. Why leave your future standard of living in the hands of the government when you could join a pension scheme and work towards providing your own comfort level.

In addition to this, the scheme offers excellent tax benefits for saving over the medium to longer term and a wealth of investment options to suit those interested in picking individual funds or those who simply wish to use the default fund option.

Next Steps
If you would like to join the pension scheme now or would like further information please contact Scottish Widows on 0345 030 6571 or via email at rachel.anderson@scottishwidows.co.uk.

Comparison of Contractor Umbrella Ltd Pension Scheme vs Nest Scheme (National Employment Savings Trust)

  Contractor Umbrella Scheme NEST Scheme
Scheme Administrator Aegon Scottish Equitable National Employment Savings Trust (NEST) Corporation
Initial Charge on Contributions 0% 1.8%
Annual Management Charge 0.7% per annum plus some funds levy an additional management charge 0.3% per annum
Do charges increase if contributions stop? No No
Can contributions be made via Salary Sacrifice? Yes No
Number of Funds to select from Over 247 funds including risk based portfolios, life styling funds and governance range of funds 5 individual funds
Number of Fund Managers 34 5
Is Phased Retirement permitted from the scheme? Yes No
Are the funds protected from Inheritance Tax? Yes No
Is financial advice available on the scheme? Yes No
Does the scheme have an employee helpline? Yes No