17.1 Introduction
Employees' work circumstances change regularly and
some of the biggest changes will come in the form of employees leaving to join
another company, going on maternity leave, sick leave or, ultimately, retiring
from your company due to age.
When an employee retires, they will take their
pension. If you provide a company pension, it is important to understand what
happens when the pension is released, as well as understand exactly what makes
up a pension. This module will answer those questions and give you more
understanding of the subject of retirement. We will discuss pensions in more
detail, including the State Pension and work-based pensions, contributions, the
ages these can be taken, and how to report to HMRC that an employee has decided
to retire.
What exactly is
retirement?
When an individual reaches a certain age they will
begin to think about their working life coming to an end - this is obviously
called retirement. When an employee retires they have several options; they can
leave work completely and spend their days doing whatever they want; they can
return to work on a part-time basis or they can enjoy volunteer work if they
choose.
This is a personal decision for that individual to
make; however, from an employer's point of view, the only real consideration is
what happens in terms of reporting this change to HMRC, and obviously
backfilling their position within the business. In the time leading up to the
employee's retirement, all paperwork and arrangements should be completed. From
an individual point of view, the years leading up to retirement will be partly
filled with consideration on how to fund life after this point, which is where
pensions come in.
17.2 What is a Pension?
A pension is a scheme which is paid
into every week or month, usually as part of wages, which builds up a nest egg
for when an individual retires.
There are different types of
pensions, which we will cover in more detail shortly. However, from a
simplified point of view, a pension makes up the money which an individual will
live on once they finish work. This is paid like a wage, usually on a monthly
basis. The amount due from the State Pension changes occasionally, so it is
important to stay up to date on this. Company pensions can top up this amount,
to give more cash during those post-retirement years. The UK government made
enrolment into workplace pensions automatic in October 2012. Whilst a workplace
pension is organised automatically, when an employee joins a company, the
employee has the right to opt-out.
17.3 Workplace Pensions
Workplace pensions are a form of saving for the
time after retirement and these are often referred to under different names -
you may hear them called 'work-based pensions', 'work pensions', 'occupational
pensions', etc - whatever name they come under, they are one and the same
overall.
There are always changes to pension rules so it is
important to stay up to date with any developments. Informing your employees of
these is also imperative, to help them continue to plan for their retirement effectively.
In terms of major changes, which can happen occasionally, the idea of putting
on a workshop or newsletter is a good option; with a point of contact for
anyone who has questions or queries. Pensions are a very important part of
working life and questions should always be answered in a timely manner. Many
large businesses have a department dedicated solely to pensions for this
reason.
In terms of a workplace pension, a percentage of an
employee's wage is put into the pension scheme every time they are paid, and
then the employer tops up that contribution with a percentage of their own.
This amount varies from company to company and is something which will be laid
out in the terms of your particular pension package. The employee then receives
a small amount of tax relief from the government in order to continue their
post-retirement savings. You could call this an incentive to continue working
towards retirement.
Upon retirement, whatever age the individual
decides to retire, a certain amount of the pension will be tax-free. This
depends entirely on the scheme offered by the employer; however, this is
generally 25% tax-free, with the rest taxable. If the amount of money in the
pension pot at the age of retirement is small, then the individual may ask to
take it as a lump sum, rather than receiving a very small amount every month as
their pension payment; again, 25% of this would be tax-free and the rest liable
for tax on that one lump sum. In terms of when an employee can retire, this is
a personal decision. There is no set retirement age anymore and an employee can
continue to work for as long as they like, without any limits from their
employer.
Obviously, to stay in touch with a high standard of
working life, there may have to be some adjustments to working conditions as an
employee gets a little older and this should always be monitored and adjusted
as necessary. An employee cannot retire before the age of 55; however, the age
they can ask to retire at totally depends on the pension scheme rules they are
enrolled in. We will discuss the State Pension retirement age in our next
section.
17.4 State Pension
The State Pension is the pension
scheme received by the employee upon retirement which is provided by the State
and is contributed to throughout working life by the employee, through National
Insurance Contributions (NICs).
It is for this reason that a gap in an individual's
National Insurance records must be avoided as much as possible, to avoid any
restrictions to State Pension entitlement benefits when old age arrives. The
current rate of the State Pension is found here.
An employee can receive a workplace
pension on top of their State Pension entitlement. This is something to which
everyone is entitled in the UK. A workplace pension can increase the amount of
money an individual receives; to make life that little bit more comfortable
during their non-working life.
It is important to instil in younger
members of staff the importance of pension contribution as they may not be
thinking about their old age just yet! As mentioned previously the mandatory
retirement age, which used to be 65, has been phased out and an employee can
now work as long as they want to. Retirement age is the term for the age that
you choose to retire from work completely.
State
Pension retirement age varies from person to person and depends on factors such
as, the year born and gender. It is important to advise your employees to seek
advice on their particular State Pension retirement age in order for them to be
eligible to receive their State Pension, despite the fact they can work past it
if they choose to.
Over the years, the
age at which an employee is able to comfortably retire is being postponed, with
more and more people choosing to work into their later years. Many large businesses
offer a workplace pension as an incentive for their employees because the
amount of money received per week on the State Pension is relatively low.
However, when
combined with a workplace pension, the individual will have fewer money worries
in the future when they choose to give up work for good, and it is for this
reason also that the UK government introduced Automatic Enrolment. We will
discuss this in more detail in our next section.
17.5 The Automatic Enrolment
Initiative - What Does it Mean?
This initiative relates to workplace
pensions and UK law states that every employer must now automatically enrol
their employees into a workplace pension scheme if they meet certain criteria.
The current criteria for Automatic
Enrolment to a workplace pension can be found here. This initiative is designed to ensure
a more comfortable standard of living for employees following retirement, and
the new law states that a percentage of 'qualifying earnings' must be paid into
the workplace scheme. The amount of 'qualifying earnings' depends on the amount
an employee earns overall before tax or the entire amount of wages before tax.
Put
simply, Automatic Enrolment ensures that every individual receives a
comfortable pension on retirement and encourages younger employees to consider
their pension requirements early on, rather than leaving it until it is too
late.
17.6 What to Do When an Employee
Retires
You need to keep HMRC up to date with
any changes in circumstances relating to your employees, which also includes
informing them of when any of your employees choose to retire.
Just as when a member of staff
leaves, you will need to update their payroll record and ensure that a correct
date of leaving is entered in the system. This will then inform HMRC at the
time of their last payday, through your full payment submission on your PAYE
software. If you are paying them a company payment, then this is also recorded;
to inform HMRC that the employee is no longer working but is receiving cash
from the company as part of their workplace pension.
If you are outsourcing your payroll
duties, then always make sure you inform them of when an employee decides to
retire, ensuring that the correct information is recorded on the payroll system
and that the correct information is passed onto HMRC as a result. Not passing
on such important information can result in costly mistakes, both in terms of
cash and time.
In larger companies there may be an
option for employees to take part in a pre-retirement course, which gives them
information on what happens next, i.e. what to expect from their pension, and
how it will be paid; thus helping them adjust to life after their working days
are over. This is not often the case in smaller businesses, however, there are
outside courses you can send your employees on, which can prove to be a very
helpful tool; informing them of everything they need to know, reducing the number
of queries that may come your way, especially if you are at all unsure
yourself. You will probably be made aware of an employee's date of retirement
quite sometime before the actual event occurs, so this will give you time to
arrange everything accordingly, ensuring all bases are covered.
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