As the legislation introduced by the Government relating to Workplace Pensions in 2012 starts to affect more and more UK employers, it’s becoming clear that there are a number of unintended consequences, which can impact on Non-Executive Directors (NEDs), as well as agency workers and self-employed Consultants.
The crux of the matter is the Pension Regulator’s definition of an ‘eligible jobholder’. This is because one of the key obligations placed on employers is to ‘assess’ their entire workforce every ‘pay reference period’ (i.e. every time they run their payroll, which could mean weekly in some cases), against the criteria for ‘eligibility’ set by the Pensions Regulator.
Those employees deemed to be ‘eligible jobholders’ and this can include NEDs, as well as agency workers and Consultants, MUST be ‘automatically-enrolled’ into a certified Workplace Pension Scheme, within 90 days of the employer’s so called ‘staging date’, being the date by which the employer must be in a position to comply with all of the new regulations.
Eligible Jobholders are those between the age of 22 and state retirement age, who are earning £10,000 or more (before tax) in a year.
NEDs therefore deemed ‘eligible Jobholders’ and subject to PAYE will find themselves enrolled into a pension scheme (whether or not they wish to be) and will have deductions made, by their ’employer’, from their pay, plus the employer will be required to contribute. The level of contributions for both parties will increase gradually over the next few years, peaking at a total of 8% of ‘earnings’, from 2018 onwards.
NEDs affected are entitled to ‘opt-out’ and receive a full refund of any deductions from their pay, however individuals cannot ‘opt-out’ until they have been ‘auto-enrolled’ and if they fail to opt-out within the required 30 day timeframe, they won’t be able to claim a refund and will therefore be left with a ‘deferred pension’.
Of greater concern however to many NEDs, is that the act of making a contribution to any form of pension scheme (voluntarily or otherwise) would result in the loss of certain forms of ‘transitional’ relief that they may hold, such as Fixed Protection 2014.
NEDs should also be mindful that cost of inclusion in an employer sponsored ‘death-in-service’ scheme, if set up under occupational pension rules, which most are, would be deemed by HMRC as an ’employer pension contribution’ and this too could result in the loss of an NED’s potentially valuable transitional relief.
The impact of this example can be significant, as it reduces the maximum value of tax free pension benefits that the NED can accrue during their working life by £250,000.
It is important therefore for NEDs to seek specialist advice from an independent (whole-of-market) financial intermediary, who specialises in advising clients in the areas of corporate and workplace pensions, as the potential tax consequences of not seeking advice may be significant. Most Chartered Financial Planning firms offer NEDs a no cost initial consultation.