Introduction
Part of an employer's auto enrolment duties includes choosing a pension provider. This article will guide you through all elements of choosing a pension provider.
The Pensions Regulator has provided a list of schemes that are currently open for new employers to join.
In your search for a pension scheme, here are some of the things you need to consider:
The cost of running the scheme
The method of tax relief
Support offered by your pension scheme
Payroll software
This article will look at the most commonly used pension schemes to show the differences offered in different schemes. These include:
NEST
Smart Pension
The People's Pension
The cost of running a scheme
Different providers will have different ways of charging for the service and use of their scheme.
Charge types include:
A one-off upfront charge
A monthly charge (based on invested contributions or a fixed fee etc.)
Annual charge
Example - NEST Charges
An annual management charge of 0.3% of the employee's fund:
Fund value is £1,000.00 therefore management charge is £3.00
Contribution charge of 1.8% on all new contributions:
New contribution in month is £100, therefore contribution charge is £1.80
There is no set up cost for joining NEST
There is no employer charge
Example - The People's Pension Charges
An annual management charge of 0.5% of the employee's fund:
Fund value is £1,000.00, therefore management charge is £5.00
There is no contribution charge
One off employer charge of up to £500 plus VAT
Example - Smart Pension Charges
An annual management charge of 0.75% of the employee's fund
Fund value is £1,000.00 therefore management charge is £7.50
There is no contribution charge
There is no employer charge
Tax relief arrangements and their benefits
Different pension schemes will offer different types of tax relief on their pension scheme. Some will offer more than one option that an employer can choose.
Tax relief on pensions fall in to 3 categories:
Salary sacrifice
Net pay arrangement
Relief at source
For information on how these 3 tax relief arrangements work please click here.
So what methods of tax relief to popular pension scheme providers offer?
NEST Tax Relief Options
Salary sacrifice
Relief at source
The People's Pension Tax Relief Options
Salary sacrifice
Relief at source
Net pay arrangement
Smart Pension Tax Relief Options
Net pay arrangement
As some pension scheme providers offer more than one tax relief option, it is important to understand the benefits of each type:
Salary sacrifice is processed before the deduction of tax and national insurance so both employees and employers benefit from a saving directly via the payroll meaning the cost of their pension contribution is reduced.
Relief at source means that employees receive a tax rebate of 20% which is added directly on to their pension contributions so their pension pot increases with this arrangement.
Net pay arrangement reduces taxable pay at the rate of tax that an employee actually pays so a 40% tax payer will receive tax relief at the 40% rate.