Workplace pensions for small business employees explained

In 2012, the government introduced plans for all employers to offer a workplace pension scheme and automatically enrol eligible workers in it. This scheme has applied to larger employers since October 2012, and will be rolled out to medium-sized and small businesses by 2018.

If you work for a small business, you should start to hear soon about workplace pensions from your employer if you haven’t already. To make sure you know how the process will work, we’re going to take you through the basics.

When will all this happen?

Small businesses will start to enrol their workers between now and 2017, with the whole process scheduled to be complete by 2018 – so you should receive information in writing from your employer about how this will affect you in the near future.

They should let you know when you will be enrolled, who the pension provider is as well as the type of pension it is. You should be told the level of contributions both you and your employer will pay into the fund and what the process is to opt out of the scheme.

To find out more about the different types of pension, check out our blog on how to know whether you’ve got a good pension.

Will I be eligible?

To be eligible for enrolment in a workplace pension scheme, you must work in the UK, be between the age of 22 and the State Pension age, earn more than £10,000 a year and not already be part of a qualifying workplace pension scheme.

If you don’t meet these specifications, you can still ask to join a workplace pension scheme. Depending on your earnings, your employer may still be required to contribute to your pension if you enrol onto it but if they don’t, they can’t refuse your request to join.

You don’t have to stay enrolled on the scheme either – you’ll have the choice to opt out manually. Just bear in mind that this decision should be entirely yours, your employer can’t force or try to encourage you to opt out of the pension and you shouldn’t be treated any differently if you decide to stay in the scheme.

How much will I have to contribute?

You, your employer and the government in the form of tax relief, will contribute to the pension. The total minimum contribution to the pension is currently set at 2% of your earnings, split up as 0.8% from you, 1% from your employer and 0.2% as tax relief. The minimum contributions are set to increase in 2017 and 2018. From April 2018 onwards, they will increase as below:

From April 2018 – March 2019: 5% of your earnings, split up as 2.4% from you, 2% from your employer and 0.6% as tax relief.

From April 2019: 8% of your earnings, split up as 4% from you, 3% from your employer and 1% as tax relief.

What if I want to opt out?

For most people, the move to automatic enrolment is likely to be welcome. But there are some reasons why you might want to opt out, particularly if you are struggling to repay your debts or you’re already close to retirement.

If you’re relying on borrowing to make it till the end of the month, your main priority should be to get on top of your debts first. Although automatic enrolment will benefit you in the long term, it makes sense to think twice if you’re currently struggling with your finances. There’s always the option to opt into a workplace pension scheme later on, once you pay off your borrowing.

The same goes for if you’re close to retiring (you’re due to finish working in a couple of years or so). If you have debts left to repay, your money would probably be better off helping you to repay these, as whatever you put into this scheme won’t have a substantial amount of time to grow before you retire.