· 2015. 6. 15. · techtalk 3...


Transcript of · 2015. 6. 15. · techtalk 3...



  • 2 techtalk


    Sandra Hogg

    Sandra is the senior tax manager within Scottish Widows with 17 years of hands on experience dealing with HMRC and advising owner managed businesses as an accountant and tax adviser. She has over 15 years insurance industry experience as a financial planning expert within the group. She represents Scottish Widows at industry forums and at the ABI’s Investment Product Tax Panel and is Scottish Widows’ expert spokesperson on Tax and Financial Planning.






    The Government’s Command Paper ‘Better workplace pensions: Further measures for savers’ includes significant changes to charges, adviser payments and governance of workplace pension schemes. This article summarises the changes, puts them into context and highlights the impacts on workplace pensions.


    A summary of the major changes to the automatic enrolment legislation in November 2013 and April 2014.


    Smart pension schemes offer a simple way for employers to cut their pension costs.


    Significant increases to the personal allowance together with the freezing of the personal allowance income limit mean more clients will be caught by the 60% marginal income tax trap and the cost of losing the allowance is even greater. Pension contributions are one of the key ways to reclaim it.


    Automatic enrolment into workplace pensions is fraught with difficulties. We look at some of the issues that need to be considered and set out some of the project management lessons.

    Thomas Coughlan

    Tom has spent over 13 years in technical roles. He has wide experience including the provision of technical support to financial advisers covering life, pensions and investment compliance. He currently specialises in pension planning and automatic enrolment.

    Jeremy Branton

    Jeremy has over 25 years experience working for financial services providers in a number of technical and advisory roles. Having joined the group in 2006 he now specialises in corporate pensions, with particular focus on Pensions Reform.

    Chris Jones

    Chris joined the group in 1996. He’s worked in a number of technical roles in marketing, product development and technical support. After many years specialising in life and investment products his recent focus has been on Pensions Reform.


    Ian Naismith

    Ian is a senior manager in retirement income & planning. He also writes and presents extensively on pensions as well as representing Scottish Widows on trade bodies and in consultations with Government.

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    Welcome to the June 2014 edition of techtalk. This month we’re updating you on recent Government announcements impacting pensions and automatic enrolment, highlighting two worthwhile areas of pension planning and reflecting on some of the challenges posed by automatic enrolment.

    The Government’s recent Command Paper includes significant changes to charges, adviser payments and governance of workplace pension schemes. Ian Naismith puts these changes into context and highlights the impacts on workplace pensions.

    Tom looks at recent legislative changes impacting automatic enrolment; namely, the introduction of tax-based pay reference periods, changes to scheme quality assessment, the extended contribution deadline and the extension to the joining window. This is essential reading for anyone with clients staging in 2014.

    Smart pension schemes provide an alternative way of setting up a salary exchange arrangement and should result in increased participation and even greater savings. Jeremy explains why.

    Chris reminds us that for those with income levels above £100,000 pension contributions can benefit from 60% tax relief, or even more where salary sacrifice is involved. The continued freezing of the personal allowance income limit means this planning will appeal to an increasing number of clients.

    And I take a look back at some of the issues employers have encountered in trying to meet automatic enrolment staging deadlines and consider why simplification is likely to be the key to meeting these deadlines in the future.

    June also heralds the issue of the 10th Scottish Widows Retirement report. The findings of this year’s report provide a lot to think about. On a positive note, more than half the UK’s population is now saving adequately for retirement – a return to numbers not seen for five years. However, 1 in 3 of the population still has no idea whether their pensions, savings and investments will meet their retirement income needs. And only 65% of us believe the individual will be required to take greater personal financial responsibility for their retirement compared with 73% in 2012 and 2013. Perhaps this indicates an expectation that, with automatic enrolment, employers will take greater responsibility. What is clear is that the importance of information and education cannot be underestimated, particularly in light of the changes announced in March’s Budget.

    We will be building on the back of these findings over the coming months. For more information on the recent Budget announcements please also take a look at our Budget articles, summaries and slides on the Scottish Widows Adviser Extranet:

    Our next edition of techtalk will be with you after the end of the summer holidays, so in the meantime please enjoy your summer and happy reading.

    Enjoy the read.

    Sandra Hogg

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    Pension charges have been under scrutiny for a number of years now, with several reports suggesting that they are far too high in the UK, especially compared with other countries. Alongside that, there has been adverse publicity about personal pensions, with suggestions that providers are more interested in their profits than the interests of scheme members, and that a trust structure is much better because the trustees have a duty to act in the best interests of members.

    Many in our industry would dispute both these assertions, but the implementation of automatic enrolment put them much higher up the political agenda. It’s felt that if people are being put in a pension without making any active choices there must be an assurance that they are getting good value.


    March 2014 will be a month that sets the agenda for the pensions industry for the foreseeable future. Alongside the Budget bombshell removing restrictions around retirement income, the DWP published its long-awaited response to its consultation on quality standards for workplace pensions, including the charge cap and commission ban. While not as unexpected as the Budget announcement, the Command Paper ‘Better workplace pensions: Further measures for savers’ will have far-reaching consequences for consumers, employers, advisers and providers.

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    • Improved transparency of charges.

    • DWP consultation on preventing adviser commissions on schemes used for automatic enrolment, and also a ban on charge increases (as a percentage) when contributions stop.

    The OFT did not believe that a charge cap was necessary or desirable.

    The Command Paper is to a large extent the Government’s response to the OFT market study, implementing some of its recommendations but taking a different view on others. It must also be viewed in the context of a 2015 General Election, and the Government wanting to complete the job on automatic enrolment and be seen to be tough on charges and governance.

    The measures in the Command Paper principally apply to qualifying schemes – that is, those which employers use to fulfil their automatic enrolment obligations, including pensions that are retained for existing members but are not used when automatically enrolling others into pension. However, some parts apply more generally to DC workplace pensions.

    Alongside the Government consultation and activity by the Pensions Regulator (tPR) to define good practice in defined contribution pensions, the Office of Fair Trading conducted a market study into workplace pensions. This found that there are significant structural weaknesses, not least because the end customers (scheme members) have very little influence. Employers may lack the capability or incentive to assess value for money, and the products are very complex. The OFT was particularly concerned about small trust-based schemes and high-charging old schemes. It proposed a number of actions:

    • An audit of old personal pensions and bundled occupational pension schemes to assess value for money, overseen by an independent project board. This audit was agreed with the Association of British Insurers (ABI) and is well under way.

    • An assessment by tPR of whether small trust-based schemes are delivering value for money, with the DWP considering whether greater enforcement powers against such schemes should be available.

    • Independent governance committees for schemes run by insurance companies.

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    MINIMUM STANDARDSNew quality standards will apply to all workplace pension schemes. There are two main purposes in this:

    1. to ensure that people running schemes understand what makes a quality scheme; and

    2. to ensure that they have members’ interests as their priority.

    The way the standards apply differs by scheme type.

    All contract-based schemes (personal pensions) must have Independent Governance Committees (IGCs) in place by April 2015. IGCs will not run the schemes, but will assess whether they deliver value for money and report on how they meet the quality standards. They will have direct access to the provider’s main Board, and will be entitled to explanations if the Board decides not to implement recommendations. IGCs will have the power to escalate concerns to members, employers and the FCA, and will also be able to make their recommendations public. In effect, IGCs are seen as replicating many of the duties of trustees in occupational schemes.



    For trust-based schemes (occupational pensions), the trustees must consider and report against the quality standards, and there will be new measures to strengthen the independence of governance in mastertrust arrangements.

    A key aim of the minimum standards is to have the same standard of governance for all types of pension. The continuance of a regime with two regulators (the FCA and tPR) means that they need to be joined-up, and they are making considerable efforts to work together. The FCA will consult during 2014 on how the new requirements will be reflected in its rules.

    Setting consistent minimum standards across workplace pensions makes sense, but it is important to ensure that regulation doesn’t become excessive, which would increase costs and reduce scope for innovation.

    SCALE IN WORKPLACE PENSIONSThe Government has reflected on the OFT’s concerns about small trust-based schemes and has decided not to take any action. A key reason for this is that there is already considerable consolidation in the market, which should reduce the problem. It also feels that the new standards for all schemes and tPR’s particular scrutiny of smaller schemes, including its codes of practice and guidance, plus the ABI audit of older schemes will be sufficient to ensure that poor value small schemes are not an issue in future.

    CHARGE CAPThe proposed charge cap caused considerable controversy, including an alleged difference of view between the Treasury and the DWP (though that was never confirmed). The original proposal was a cap of 0.75% or 1% a year, or a 0.75% cap with the ability to go up to 1% if that could be justified. In the end, a cap of 0.75% a year was chosen, with the Government steering a middle course between the hawks who believed the charge cap should be even lower, and those (including the OFT) who argued that a cap could be counter-productive.

    The cap will apply to default funds for automatic enrolment and common funds for older products. All charges are included, but initially not transaction costs which are incurred when asset managers move assets within funds. In broad terms, the cap is on total expense ratio (TER) which covers a wider range of costs than the annual management charge (AMC). A cap that includes transaction costs could follow as a second stage.

    The charge cap will be introduced for all qualifying pension schemes from April 2015. It is therefore not universal across workplace pensions, but schemes which are not covered will generally be part of the legacy audit agreed with the OFT, and as a result are likely to have future charges limited to 1% a year.

    Schemes, including NEST, which have more than one charge are also subject to the charge cap, with a lower maximum annual fund-based charge so that overall charges are broadly within the 0.75% cap.

    Alongside the cap, the Government is banning a number of market practices:

    • Active member discounts (AMDs), where the yearly charge as a percentage of the fund is lower for those contributing, and increases when they leave employment, will be outlawed from April 2016. Since AMDs reduce percentage charges for active members, these are likely to increase as a result of the ban. It will also increase the cross-subsidy from long-serving members who build up large funds to those who leave after a short time with small funds – reducing this cross-subsidy was a large part of the rationale for AMDs.

    • Consultancy charges, where members are charged for advice given to the employer, will be outlawed from April 2015. These have almost disappeared anyway after the Government made it clear that it was far less relaxed than the FSA (now FCA) about them.

    • Legacy commission on schemes set up before RDR was implemented will also be banned from April 2016.

    For the two changes that apply from 2016, the charge cap will still apply from 2015 so providers may well look to implement them earlier than required by legislation.

    These changes are likely to have a major impact on providers and advisers, with a very significant loss of future revenue for many. There is also a danger that they may reduce scope for innovation, including in the ‘defined ambition’ pensions proposed by the Government.

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    TRANSPARENCYAlongside the reduction in charges, the Government wishes to ensure that they are absolutely transparent. The industry has already gone a long way down this road. Following an NAPF initiative, charges are available to employers in a standardised format and the ABI developed a tool to help employers compare charges. This is hosted on The Pensions Advisory Service website. In addition, insurance companies have signed up to an agreement on presentation of charges to scheme members, including changes to yearly statements for schemes used for automatic enrolment so that they will show charges deducted in monetary terms later this year. However, other types of schemes have made much less effort on this, and the Government wants consistent high standards.

    From 2015 trustee boards and IGCs will have a duty to consider and report on charges and costs. It is then proposed that regulations and FCA rules will require full disclosure of administration charges and transaction costs in a standardised and comparable format.

    Providers and trustees will be required to provide information about charges and costs to employers before the employer makes a choice of scheme and yearly after that, making price comparison of schemes easy.

    Providers and trustees will also have to provide information on charges to scheme members when their pension starts and every year after that. This disclosure is likely to be simpler than to employers, but more detail will have to be available to those who want it.

    While most of the measures proposed are already part of the good practice being established by our industry, there is no guarantee that the detail of the regulations and FCA rules will be the same. Obviously, providers will be working with the authorities to ensure that the new rules are proportionate, helpful to employers and consumers, and can be delivered at reasonable cost.



    ON CHARGES AND COSTS.. While everyone agrees that transparency is a good thing, getting the right level of detail for those reading it is very difficult. And a focus on cost at the expense of other aspects of a quality pension is dangerous. If there is a race to the bottom, ultimately consumers may lose out. In reality, the effect of small differences in AMC, which is all we really see in the market for new schemes at present, is much less than is often made out.

    CONCLUSIONSThe Government is absolutely right that those being automatically enrolled should be able to be confident that they are entering good pension provision. However, the changes proposed are going to lead to considerable market upheaval, and not all consumers will gain as a result. At this stage, it is difficult to say whether the measures being introduced by legislation will leave consumers better off overall than those which the pension providers were voluntarily introducing. However, they will introduce common standards, and that should ensure that all schemes – whether with insurance companies or self-administered – provide low cost pensions with high governance standards. The Government may well consider that a success in itself, even if there is some levelling down of quality and innovation to remain within the price cap.

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    Tax-period based pay reference periods for assessment of qualifying earnings.

    The original legislation only allowed for one type of pay reference period; the period over which staff are paid their wage or salary. For example, a worker who is paid on the 26th of each month for the work done from the first to the last day of that month would have – under this definition – a pay reference period of a calendar month. Similarly, a worker paid each Tuesday for work done from Sunday to the Saturday before pay day has a pay reference period of a week running from Sunday to Saturday.

    Whilst this pay reference period worked for many employers it didn’t fit well with the tax calendar that is required to operate PAYE and calculate national insurance contributions. Operating two separate periods was difficult for some employers and in some cases not possible within the constraints of their existing payroll. To overcome this issue, the amended legislation allows an employer to set the pay reference period as a tax week or tax month or some multiple of those periods e.g. two tax weeks or two tax months. The first tax week or tax month of the year starts on 6 April and subsequent periods run in line with the tax calendar. The first tax month, therefore, runs from 6 April to 5 May and the first tax week from 6 April to 12 April.


    Last November, a round of technical changes to the automatic enrolment legislation was completed. With further consultation underway to address other issues with the original legislation, many in the industry are hoping for further refinement. The 1 November changes – including those that were deferred until 1 April 2014 – are summarised here.

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    For more information about how the employer assesses its workforce using pay reference periods, please see Automatic Enrolment Factsheet 1: Pay Reference Periods on the Scottish Widows Adviser Extranet.

    Pay reference periods for assessing scheme qualityPay reference periods also serve another purpose – to determine if a scheme has met the minimum requirements. Before the amended legislation was introduced, the pay reference period for this purpose was always an annual period beginning on the staging date or the anniversary of the staging date. It was noted in the consultation that using an annual period could result in an anomaly where the scheme calculates contributions based on a weekly or monthly pay reference period and a worker has fluctuating earnings. To resolve this perceived issue, an employer can now use the same period for assessing scheme quality that is used to assess workers’ qualifying earnings.

    In line with the other legislative changes, the employer still has the choice of using the existing rule – the annual period – for assessing scheme quality. It should be noted that if an anomaly arises because the employer is comparing contributions calculated using a weekly or monthly pay reference period against the minimum contributions calculated using an annual pay reference period, this in itself does not affect the qualifying status of the scheme nor require an annual reconciliation to rectify any apparent shortfall in contributions. That both periods can now be brought in line, however, significantly simplifies the process and minimum requirement schemes should take advantage of the new rule.



    Payment deadlinesFrom 1 November 2013, the deadline by which an employer must have forwarded contributions to the scheme was amended. The existing deadline of the 19th (or the 22nd for electronic payments) of the month following the month of deduction remains, however contributions deducted in the first three months of membership benefit from an extension. Any contributions deducted in the first three months of membership must be forwarded to the scheme by the 19th (or 22nd) of the fourth month. This applies to contributions deducted for eligible jobholders who have been automatically enrolled, non-eligible jobholders that have opted in, entitled workers that have joined and contractual enrolees into a qualifying scheme.

    This deadline will not be relevant for schemes where the automatic enrolment process requires the contributions to be forwarded to the provider to achieve active membership of the scheme. In such cases, the joining window imposes stricter criteria and so the 19th day of the fourth month deadline should be easily met.

    EXAMPLEA distribution company with approximately 100 employees operates a monthly payroll. Workers are paid on the 23rd of each month for the work done from the 16th of the previous month to the 15th of the month of payment.

    The employer must decide which is the most appropriate pay reference period for its scheme; it can use the period by reference to which staff are paid their wages, which is a monthly period starting on the 16th day of each month. Or – as the pay interval is monthly – the employer is able to use tax months as the pay reference period; a monthly period starting on the 6th of each month.

    The example illustrates an important point about tax-based pay reference periods, which is that the length of the pay reference period is defined as the interval between pay dates. This has positive implications for employers operating a 4-4-5 week pay cycle but with a monthly pay date as they can now use tax months for their pay reference period.

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    Leavers from contractual enrolment schemesThe consultation discussed the possibility of excluding certain individuals from automatic enrolment. Namely those who had ceased membership of a qualifying scheme following contractual enrolment. No changes were made to the legislation as a result, so employers still have to include contractual enrolment leavers in their assessment. In the original legislation, employers do not have to automatically enrol eligible jobholders who have left a contractual enrolment qualifying scheme until the triennial review, provided that they were eligible jobholders at some point whilst a member of that scheme. That position has not changed but an extension to this easement is being considered in the latest consultation.



    The joining windowThe above changes were all effective from 1 November 2013. The extension to the joining window was the exception to this; the change being delayed until 1 April 2014.

    Employers must complete the automatic enrolment process within the joining window. This starts on the automatic enrolment date such as the staging date, an employee’s first day of employment or their 22nd birthday and – prior to 1 April 2014 – ended one month later. Some employers had difficulty completing the enrolment process within one month – in particular employers with calendar month pay reference periods where payroll was run late in the month. In acknowledgement of this, the joining window was extended to six weeks.

    EXAMPLEAn employer stages on 1 May 2014 deciding not to use postponement. The enrolment process must be completed by 11 June 2014; each eligible jobholder being provided with information about the scheme and their opt-out rights amongst other things and becoming an active member of the scheme by this date.

    Extension to the joining window: Other consequential changesAlong with the change to the joining window, other consequential changes were required. These were the postponement notice deadline, the registration and re-registration deadlines and the disclosure of information requirements.

    Postponement noticesTo ensure consistency, the deadline within which postponement notices must be issued was also extended from one month to six weeks.

    Registration and re-registration deadlinesThe original registration deadline of four months would not fit with a six week joining window, where the employer opts for the maximum three months postponement. Therefore, from 1 April 2014, the registration deadline is extended to five months. Similarly, the re-registration deadline increases from one month to two months.

    Disclosure of scheme informationThat the automatic enrolment process must now be completed within six weeks from the automatic enrolment date means that scheme information could potentially be issued later. The one month window within which certain information must be disclosed to scheme members can start up to six weeks after the automatic enrolment date, rather than one month after. The opt-out window remains at one month from the receipt of this information.

    FURTHER CONSULTATIONIn February 2014, the government published its response to further proposed amendments to the automatic enrolment legislation. This concerned the granting of exceptions from automatic enrolment duties for certain categories of worker. These include workers with tax protected status, retirees, leavers, contract joiners and those in ill-health. Their response suggests that there is strong support for the exclusion of workers with tax-protected status, but the onus being on the worker to inform their employer of their status. There is also support – as mentioned above – for the exclusion of leavers from qualifying schemes to prevent the so called ‘double opt-out’ scenario. At the moment we don’t know whether these exceptions will become available or what form they will eventually take. We will provide an update when further details are available.

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    Many employers will be facing an increase in costs as they seek to comply with their duties under the automatic enrolment legislation. Choosing to operate their scheme on a smart pension scheme basis can deliver significant savings, encourage member engagement and help the employer satisfy their statutory obligations. We explain how.


    A smart pension scheme incorporates salary exchange – just with an alternative joining method. It’s used in conjunction with a pension scheme that accepts employer contributions –this could include a group personal pension (GPP) as well as occupational money purchase schemes. It’s also compatible with automatic enrolment – subject to certain safeguards. Popular in the past with larger employers who recognised substantial savings can be made for a modest outlay, it should appeal to employers with schemes of all sizes.

    It operates in the following way:

    • The employee stops making paying pension contributions from their salary.

    • Their employer pays an amount directly into the pension scheme equal to the amount or percentage that the employee was contributing.

    • The employer reduces the employee’s salary by an amount equal to the amount or percentage that the employee was contributing.

    • The reduction in salary means the employee pays lower National Insurance Contributions (NICs) leading to an increase in their take-home pay.

    • By paying a lower level of salary, the employer also pays lower NICs leading to a reduction in costs associated with pension provision.

    • Employees are notified by the employer that the changes will apply from a future date unless they decide to opt-out in advance.


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    The employer can specify the length of the salary exchange arrangement which will usually cover a 12 month period. Exceptions to this would be where the employee experiences a lifestyle change – for example marriage, divorce, birth of a child, death of a dependant or significant change to working hours – these events would be specified by the employer. When a smart pension scheme is used alongside automatic enrolment, ceasing membership or opting out would also trigger the early end of the arrangement.

    WHY USE A SMART PENSION SCHEME?The ability to make significant cost savings is key to salary exchange and we illustrate the financial benefits below. In addition, a streamlined process for implementation is likely to result in a greater take-up rate from employees and even greater savings!

    The main difference between a smart pension scheme and a ‘traditional’ salary exchange arrangement is that with the latter each employee is required to take action to set the arrangement up. This is done by the employee signing and exchanging letters with their employer to confirm the change to the terms of their contracts of employment. By contrast, smart pension schemes offer an automatic joining process on a ‘negative affirmation’ basis – that is employees only need take action if they choose not to participate. An arrangement that doesn’t require the employees’ active involvement to join and relies on employee apathy to leave can be expected to lead to greater participation. That is, it uses the same nudge principal that underlies automatic enrolment.

    For the smart pension scheme to be effective, employers must communicate details of the variation to the contract of employment to all affected employees in advance of their salaries reducing. An explanation of how the individual employee will be affected should be included and sufficient time provided for employees to make a decision – typically 4-8 weeks before payments commence. Unless employees choose to opt out of salary exchange they are deemed to have accepted the revised terms and conditions to their employment – a position confirmed as acceptable for tax and NICs purposes by HMRC.

    Additional contract and employment law considerations may apply for employers intending to use a smart pension scheme with contract based pension schemes – such as GPPs – and employers should seek legal advice before proceeding.

    Further information on salary exchange may be found on the Scottish Widows adviser extranet, including adviser and employer guides and a salary exchange corporate-pensions/salary-exchange

    NOTIONAL LEVEL OF SALARYWhen operating a salary exchange arrangement, a lower level of salary would normally impact salary linked benefits such as overtime payments, bonuses and pay rises. The lower figure could also be used in respect of mortgage and loan applications and might deter employees from participating in salary exchange. Fortunately, smart pension schemes can retain the pre-exchange salary as a ‘notional’ salary for the

    calculation of these elements of pay and even mortgage and loan applications. Where a notional salary is retained, employees’ pay slips need not reflect an actual cut in pay provided the employer can demonstrate to HMRC’s satisfaction that the change to the employee’s contract of employment has taken place.

    WHAT ARE THE FINANCIAL BENEFITS?Employers and employees will pay lower Class 1 NICs as a result of the reduction in salary on the basis shown below – all 2014/2015 rates:

    Type of contribution

    Earnings (post exchange) NIC rate

    Employer >£7,956 13.8%

    Employee £7,956 – £41,865


    Employee >£41,865 2%

    Employers will face some additional administrative costs from setting up the arrangement but could offset these against their NIC savings. They might also choose to pass on some of their savings as an additional pension contribution further improving the appeal of the arrangement to employees.

    Employees benefit from an increase in take-home pay without any reduction to their pension contributions.

    EXAMPLEJohn earns £25,000 pa and currently contributes 5% of his salary to a group personal pension provided by his employer, who also contributes the same amount. His employer sets up a smart pension scheme whereby John’s salary is reduced by the amount of his pension contributions in return for the employer increasing their pension contributions by the same amount. John’s employer agrees that contributions will still be based on the pre-exchange salary. The result is the employer’s costs reduce, John’s take home pay increases and pension contributions remain at the same level.

    Before exchange

    After exchange Benefit

    Employer position – Total cost (salary, pension & NICs

    £28,602.07 £28,429.57 £172.50

    Employee position

    £18,954.72 £19,104.72 £150.00

    Total gross pension contributions

    £2,500 £2,500 N/A

    All figures based on income tax and NICs for tax year 2014/2015.

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    The automatic enrolment legislation does not permit

    employers to make any form of salary exchange a condition

    of access to an automatic enrolment workplace pension

    scheme. An employer must make alternative provision for

    any employees who opt out of a smart pension scheme.

    In practice an employer could set up a smart pension

    scheme in advance of its staging date, giving enough time

    to make the necessary changes to employees’ contracts for

    salary exchange before contractually enrolling employees

    into its pension scheme. When it reaches its staging

    date, the employer wouldn’t need to automatically enrol

    members who have joined the scheme provided it has

    met all the conditions relating to qualifying workplace

    pension schemes. It would, however, need to be able to

    accommodate any employees choosing to opt out of the

    smart pension scheme.




    While it’s possible to set up a smart scheme at the employer’s staging date, bear in mind that providers are aiming to streamline their automatic enrolment processes to deal with the surge in numbers of employers staging. It may be worth considering setting up a smart pension scheme some time after completing automatic enrolment. It would then be directed at employees who had already engaged with workplace pension provision.

    The ability for automatically enrolled or opted in members to opt out of the scheme within one month means where a salary exchange arrangement has been set up alongside an automatic enrolment scheme, members choosing to opt out will have their salary returned to its previous level without having to wait until the end of the usual 12 month period. This would also apply to individuals contractually enrolled into a workplace pension scheme with a salary exchange arrangement in place who choose to cease membership.

    It will be important that communications in respect of the smart pension scheme are kept separate from those relating to automatic enrolment – such as the provision of information to active members.


    Whilst offering clear savings, a smart pension scheme won’t suit every employee and the employer will need to be able to identify and manage those employees who might fall into one or more of the following categories:

    • Employees with earnings below the NIC primary threshold – £7,956 pa for 2014/2015 – will not be liable for NICs and will not receive any savings via salary exchange.

    • Salary should not be exchanged below the NIC lower earnings limit – £5,772 pa for 2014/2015 as this would result in a loss of state benefits such as the basic state pension and state second pension (S2P). It could also affect entitlement to the single tier pension under the proposals for state pension reform due to be implemented in 2016.

    • Earnings must not fall below the National Minimum Wage as a result of salary exchange.

    • Under the current state pension rules, some employees could see a reduction in their entitlement to S2P which will offset some of their savings from salary exchange.

    • An employee who has reached state pension age will no longer be liable for NICs so would not gain from a salary exchange arrangement although the employer would benefit if the employee agreed to it.

    • Statutory benefits such as statutory maternity pay will be based on the reduced level of salary and not the notional salary – an important consideration for those anticipating receiving these types of payments.

    • Some part-time staff working less than 16 hours per week could see a change to their Jobseeker’s Allowance.

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    The restriction to the personal allowance for those with

    income of more than £100,000 was introduced in April

    2010. Where an individual’s ‘adjusted net income’ is above

    the income limit of £100,000 the amount of personal

    allowance is reduced by £1 for every £2 above the income

    limit. This means the basic personal allowance of £10,000

    in 2014/15 will be completely lost where the adjusted

    net income is £120,000 or more. The full loss of all the

    personal allowance will now cost a tax payer an additional

    £4,000. This, on top of the higher rate income tax, means

    the effective tax rate for income between £100,000 and

    £120,000 is a massive 60%.


    Significant increases to the personal allowance together with the freezing of the personal allowance income limit mean more clients will be caught by the 60% marginal income tax trap and the cost of losing the allowance is even greater. Pension contributions are one of the key ways to reclaim it.

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    The personal allowance income limit has remained unchanged since its introduction, meaning more individuals will now be affected by the restriction. In addition, with the large increases in the personal allowance over the last few years a larger proportion of high earners’ income will now be subject to the 60% tax.

    The personal allowance income limit is based on an individual’s adjusted net income.

    Adjusted net income is calculated as a series of steps

    1. Calculate the individual’s total income that is subject to tax.

    This will include:

    • earnings from employment including benefits in kind • profits from self-employed/partnerships• rental income• interest on savings• dividend income from shares• life policy chargeable event gains (the full gain,

    not the top sliced gain).

    2. Make specific deductions. The main ones are:

    • payments made gross to pension schemes ie contributions to occupational pension schemes via the net payment method

    • self employed trading losses.

    3. Deduct the grossed up amount of

    • pension contributions which have received tax relief at source

    • gift aid donations.

    HOW PENSION CONTRIBUTIONS CAN HELPPoints 2 and 3 of the calculation highlight that contributions to both occupational and personal pensions can be used to reduce adjusted net income and so reclaim the personal allowance.

    Let’s look at an example where personal pension contributions are used.

    Hannah has income of £120,000 in 2014/2015. A net pension contribution of £16,000 receives £4,000 tax relief at source. Her net income falls by £8,000 in return for a total pension contribution of £20,000, an effective tax relief of 60%.

    No pension

    Personal pension


    Income £120,000 £120,000

    Personal allowance

    £0 £10,000

    NI £5,632 £5,632

    Tax £41,627 £33,627

    Net employee pension contribution


    Net income £72,741 £64,741

    Effective tax relief


    USING SALARY EXCHANGE Where salary exchange is available this can produce even higher effective rates of tax relief. Salary exchange will reduce the level of earnings and so also reduce the amount of both employee and employer national insurance contributions. If the employer is willing to re-invest their NI saving the effective rate of tax relief can be up to 66%.

    So if Hannah exchanged salary instead of making a personal pension contribution the figures would be*:

    Salary exchange and employer contribution

    Income £99,310

    Personal allowance £10,000

    NI £5,218

    Tax £29,351

    Net employee pension contribution


    Net income £64,741

    Employer contribution £23,546

    Effective tax relief 66%

    *This assumes that Hannah’s take home pay remains the same as in the example above where a personal pension contribution is made. She could choose to exchange slightly less salary and receive a slightly higher take home pay.

    INCOME ABOVE £120,000Those with income above £120,000 can also benefit from making a pension contribution. As long as the contribution is high enough to bring the net adjusted income below £120,000 the effective rate of tax relief will be greater than 40%.

    Marianne has income of £140,000 in 2014/2015. A net contribution of £32,000 receives £8,000 tax relief at source. Her net income falls by £20,000 in return for a total pension contribution of £40,000; an effective tax relief of 50%.

    As in the previous example – if Marianne’s employer is willing to allow salary exchange even higher effective rates of relief can be achieved.

    Both options are shown in the table on the next page:



  • 16 techtalk

    No pension

    Personal pension


    Salary exchange and

    employer contribution

    Income £140,000 £140,000 £98,620

    Personal allowance

    £0 £10,000 £10,000

    NI £6,032 £6,032 £5,204

    Tax £49,627 £37,627 £29,075

    Net employee pension contribution

    £32,000 £0

    Net income

    £84,341 £64,341 £64,341

    Employer contribution

    £0 £0 £47,090

    Effective tax relief

    50% 57.5%


    Where the level of contribution needed to bring adjusted net

    income down to £100,000 exceeds the annual allowance

    of £40,000, carry forward will be required. This could be

    where significant employer or employee contributions are

    already being made or where income exceeds £140,000 a

    year. Ongoing planning would be limited by the availability

    of unused relief from the previous three tax years. In these

    cases, planning may be more useful where clients have a one

    off spike in earnings perhaps due to an exceptional bonus

    payment rather than where income is consistently high.

    Of course income doesn’t have to be brought down to as low

    as £100,000. As long as adjusted net income is reduced

    below £120,000 at least part of the personal allowance will

    be reclaimed.


    When making significant pension contributions it is

    important to check the client’s available lifetime allowance

    (LTA). However, as the effective rate of relief can be 60% or

    even more with salary exchange, and the lifetime allowance

    lump sum charge is 55%, in some cases it may even be

    worth making contributions when clients have or are likely

    to exceed the LTA. Clearly this only applies where all or the

    vast majority of the marginal rate is within the £100 – £120k

    income bracket, however it is worth considering for certain



    In addition to making pension contributions there are a

    couple of other ways in which some or all of your client’s

    personal allowance can be reclaimed

    • Donations to charity

    Not only can an individual with earnings between

    £100,000 and £120,000 reclaim higher rate tax on a

    charitable donation, it will also reduce their adjusted

    net income and so reclaim all or part of their personal

    allowance. This allows clients to make generous donations

    or sponsor friends at a significantly lower total cost to


    • Cycle to work scheme

    Unfortunately most cycle to work schemes are limited to

    £1,000 however, for clients earning between £100,000

    and £120,000 this already generous scheme will offer

    even greater advantage. The scheme works by salary

    exchange saving both income tax and NI. As salary

    reduces it would also mean that those in this bracket

    will reclaim part of their personal allowance. This could

    mean an initial saving of 62% on the cost of a new bike.


    • Pension contributions provide a tax efficient way of reclaiming the personal allowance with an effective rate of up to 60% tax relief.

    • Those with income above £120,000 can also benefit by paying a personal pension contribution or using salary exchange to reclaim their personal allowance.

    • Where an individual has income exceeding £140,000, or total pension contributions exceed £40,000 consider using carry forward to enable the full personal allowance to be reclaimed.

    • Don’t delay planning until the end of the tax year. If salary exchange is being considered it can’t apply retrospectively.

    • Remember to take account of an individual’s total income subject to tax when calculating their adjusted net income.

  • techtalk 17


    The driver behind automatic enrolment might be workplace pension reform, but it didn’t take anyone long to appreciate that implementing a solution is really all about project management and payroll processes and it’s proved to be very very difficult.

    In fact there’s been a sustained period of extreme learning

    since the first employers started staging in October 2012.

    Several thousand employers have now fulfilled their

    automatic enrolment duties and almost without exception

    the actual implementation has thrown up a number of


    Many of the larger employers were able to rely on dedicated

    HR and payroll resources to implement their staging and will

    have planned well ahead for automatic enrolment. Around

    30,000 medium sized employers (50 – 249 employees) are

    expected to have reached their staging date by the end of

    2014. So what are the key lessons that could help these

    employers avoid some of the likely difficulties?

    PROJECT PLANNINGProject planning – from initial analysis and planning of the changes, through to delivery, compliance and governance – will be essential to the successful implementation of automatic enrolment solutions for employers in 2014 and beyond.

    Planning for the implementing of automatic enrolment should look to:

    • Split the process into stages and tasks;• Clearly define tasks to be completed;• Clearly assign roles and responsibilities for each phase; • Give each task a RAG (Red / Amber / Green) status to

    highlight if tasks have been completed on time and if

    everything is on track to hit the staging date.

  • 18 techtalk


    Many employers will already have a workplace pension scheme for some or all staff and this may well form the basis of their automatic enrolment solution. Whether the scheme is to be used for automatic enrolment, for contractual joining of new employees or non-members, as a qualifying scheme for existing members only, or is closed to both new entrants and further contributions existing members will need to be informed.

    If terms and conditions are being altered, for example the definition of pensionable earnings is changing or the level of employee contributions is being increased, existing members may have to be given suitable notice. This will require letters to be sent out to existing members describing the change and the impact on their contributions and benefits.

    The impact of enrolling a large number of new members into an existing scheme may also affect the charges that the provider needs to make. Where there is a large proportion of low paid, short term employees, it may be more attractive to use one of the basic pension providers – NEST, The People’s Pension or NOW Pensions.

    If the existing scheme is an insured group personal pension or group money purchase scheme and was set up some time ago, there is a risk that the provider won’t support the use of the scheme for automatic enrolment. The suitability of a particular product should always be checked with the provider at an early stage in case another solution is required.


    Agreeing the level of contributions is only the first part of the process. There are a number of other options for the employer to consider:

    • Which employees are eligible? Assuming a single solution model this means identifying

    any workers who do not fall within the automatic enrolment regulations or are employed by a different entity.

    If any sort of segmented model is being used the employer has to clearly define which employees are eligible for which section or scheme and of course they should always check that their chosen product provider will be able to accommodate more than one scheme or section.

    • Should postponement be used? Using postponement reduces some administration

    pressures on the employer as it avoids automatically enrolling very short term employees and assessments based on partial pay periods. So far, most employers have used postponement.

    • What is the opt-out process? This has to involve the pension provider and will depend

    on the options offered. Typically there is either an on-line process or a call centre approach.

    • What terms should be offered to opt-ins?

    Legally, non-eligible jobholders who opt in have to become members of an automatic enrolment scheme whereas entitled workers only have the right to join a UK registered pension scheme, but there is no requirement for this to be a qualifying scheme nor is there any requirement for the employer to contribute.

    In theory, therefore, separate schemes, and contribution levels, could be used for eligible jobholders being automatically enrolled, for non-eligible job holders opting in and for entitled workers opting to join. In practice this may be an unnecessary complication and the simplest approach would be to offer the same terms to everyone whether enrolled or opted in.

    SIMPLIFICATION• Don’t try to provide too many options for employees. You

    may be adding unnecessary complexity.

    For example, an employer concerned about having to enrol even short-term staff into its main scheme could place new starters into a separate section based on the minimum total contribution of 2%, with at least 1% paid by the employer (for example 1% paid by both the employer and employee before October 2017), with an option given to them to join the employer’s main scheme once they have completed say 12 months service. This helps keeps the cost of automatic enrolment down initially whilst at the same time rewarding staff loyalty.

    • Consider moving weekly paid staff onto the monthly payroll.

    This will require some consultation with staff members affected. However, taking this step could make ongoing processes much simpler – giving a single monthly pay reference period and assessment versus a combination of weekly and monthly pay reference periods and assessments.

    IMPROVE DATA QUALITYNot surprisingly, this has emerged as one of the biggest issues to date.

    Because the automatic enrolment process covers all employees and requires a number of tests and communications based on employees’ personal details it is imperative that the data held by the employer is correct and up to date.

    Simple mistakes, such as gender / date of birth discrepancies, missing or invalid national insurance numbers, missing contractual joining dates and seemingly harmless errors such as using a zero for the letter ‘o’ can cause severe delays.

    Any work an employer can undertake to limit these types of errors will help them to meet their requirements on time.

    Also, many employers will have different HR and payroll systems with required data split across these systems. They therefore need to consider early on in their planning how they will access this data and provide it in the required format.

  • techtalk 19

    RESOURCE AT THE RIGHT LEVELPreparing for automatic enrolment is going to put pressure on existing HR and payroll staff and will also take up a significant amount of management time. Employers need to work out the likely impact and make sure they have set aside enough time and have the right resources in place. They also need to ensure that the people they use to carry out this work have the sufficient level of authority to make any changes needed.

    CASE STUDYCompany A had several staging dates and multiple payrolls, including weekly and monthly which meant multiple pay reference periods. And it took a segmented approach, with permanent employees and those on temporary contracts going to two different providers.

    The benefits manager was left to pretty much manage automatic enrolment single handedly. Whilst he had a good grasp of benefits provision across the company, his knowledge of how different populations were set up in payroll was limited. This meant different populations that needed to be included for assessment were identified fairly late in the process. Dealing with these issues across two different providers added to the pressure. He tried to align some staging dates and postponement periods to simplify matters. However, he didn’t have the authority to make some of the desired changes.

    As a result the employer had to produce its own postponement notices as the provider was unable to have a solution ready in time due to the lack of clarity around requirements. It’s also likely that a more streamlined ongoing process could now be in place if more senior employer stakeholders had been involved in the project.

    Whilst planning commenced fairly early on, the lack of resource available from the company meant a slow delivery of the project and a great deal of stress for the benefits manager.

    Proper preparation at outset is the only way to avoid problems, higher than necessary administration costs and potential non-compliance, which could lead to fines at a later date.


    Salary exchange – when an employee gives up the right to receive part of the cash pay due under his or her contract of employment, in return for the employer’s agreement to provide the employee with some form of non-cash benefit, such as a contribution to a registered pension scheme – is a tried and tested method for reducing national insurance costs. As such it will appeal to many employers looking to reduce their national insurance bill.

    However, salary exchange does not sit well within an automatic enrolment process. What’s the issue? Well, in a nutshell, salary exchange involves an element of choice on the part of the employee. However, the process of automatically enrolling employees into a workplace pension scheme cannot require them to provide any information or make any choices e.g. about how their funds are invested.

    There are solutions, with many providers stipulating that salary exchange is arranged before or after automatic enrolment and is not part of the actual automatic enrolment process. This topic is too big to give it justice here so for more information please see: ‘Salary exchange: helping employers meet the automatic enrolment challenge’ at


    Finally, whether you are using provider’s middleware or proprietary solutions from payroll or flex benefit providers, employers should make sure that all the required data is available and can be provided in a format which is acceptable to the pension provider well before the employer’s staging date.

    Common areas of difficulty that need to be considered in advance include: payrolls on other than a monthly basis; multiple staging dates; differing pay reference periods; multiple contribution bases; or even differing bank accounts. Differing charging bases can also cause issues.

    And remember some providers are asking for as much as an 18 month lead-in time.

    The lessons learnt since October 2012 will mean that many providers will be looking to give employers a clearer simpler route to help them meet their statutory requirements in 2014 and beyond.

    In order to administer the enormous volumes of schemes staging this year many providers will have streamlined their processes and dedicated part of their workforce to ensuring the successful implementation of automatic enrolment.

    And the focus is likely to be much more on simplification, rather than bespoke tailored solutions.

    The important message for employers is that preparation for automatic enrolment is as important, if not more important, than the actual staging date processes and simplification will be key.



  • This publication represents Scottish Widows’ interpretation of the law and HMRC practice at the time of writing this publication. The contract terms and the amount and taxation of benefits described assume that there is no change in tax or other law affecting Scottish Widows

    or its investments and will depend on the investors’ financial circumstances. The information in this publication is based on the assumption that tax legislation is not changed. Tax assumptions are subject to statutory change and the value of any advantages depends on personal circumstances.

    Every care has been taken to ensure that this information is correct and in accordance with our understanding of the law and HM Revenue & Customs practice, which may change. However, independent confirmation should be obtained before acting or refraining from acting in reliance upon the information given.

    Past performance isn’t a guide to future performance. We’ll record and monitor calls to help us to improve our service.

    Scottish Widows plc. Registered in Scotland No. 199549. Registered Office in the United Kingdom at 69 Morrison Street, Edinburgh EH3 8YF. Telephone: 0131 655 6000.

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