When you help a client to choose a pension scheme for automatic enrolment you should check it meets certain rules. You should also consider issues such as cost, whether it works with your client's payroll and what tax relief method it uses.
Your client may ask you to help them check whether they can use their existing scheme or to help them find a new scheme.
- Check that a scheme meets the automatic enrolment requirements and will accept all your client’s staff.
- Consider issues such as whether it works with your client’s payroll software, what additional help they need, the investment options offered and the charges to pay.
- Help your client to choose a new scheme if they can’t use their existing scheme for automatic enrolment.
Can your client use the scheme?
The scheme that your client uses for automatic enrolment must meet certain requirements, eg it doesn’t require staff to do anything to join the scheme or to choose their own investments. Other requirements include the scheme:
- being tax registered in the UK
- being an occupational or personal pension scheme
- requiring a minimum level of contributions to be paid into the scheme – this depends on the type of scheme
For more information on the minimum requirements for schemes to qualify and to be used for automatic enrolment, see Detailed guidance 4: Pension schemes (PDF, 352kb, 38 pages).
Some schemes may only accept employers with a minimum number of staff or who have staff that earn a certain amount. Check if your client can use the scheme for all their staff.
Costs and charges
You should ask the provider what charges your client and their staff will pay.
Your costs and charges
Different providers may charge your client in different ways, for example an ongoing monthly charge or a one-off up-front charge for the life of the pension scheme. Some schemes may also have an exit fee for employers who change pension schemes.
Staff costs and charges
Pension scheme members pay charges to cover the cost of managing their savings. Some schemes may have different charges for different members. For example, some schemes may have lower charges for low paid staff, which may mean that these staff pay less for their pension, whichever type of tax relief the scheme uses.
You may want to help your client weigh up the costs and charges against the level of services that the scheme will provide. Some services may make automatic enrolment easier for your client over the long term.
There are two ways that your client’s staff can get tax relief from the government on what they pay into their pension scheme.
These are commonly known as relief at source, and net pay arrangements - although some providers use different names. If the scheme uses relief at source the scheme provider will claim the tax relief from HM Revenue & Customs. If the scheme uses net pay arrangements the employer will need to calculate tax on the pay that is left after they’ve paid into the pension.
A scheme can only use one method for your client and this will affect their lower and higher paid staff in different ways.
Staff who don't pay income tax
If your client has staff who don’t pay income tax these people will only get tax relief if their scheme uses relief at source. If your client chooses a scheme that uses net pay arrangements, these staff will need to pay 20% more for their pension.
Some schemes that use net pay arrangement may have lower member charges so your client will need to consider this carefully.
If your client uses salary sacrifice to manage pension contributions, staff who don’t pay income tax won’t get tax relief whichever method their scheme uses.
Staff who pay tax
If your client’s staff pay income tax they will get tax relief whichever scheme they use. However, if your client has higher and additional rate taxpayers and the scheme uses relief at source these people will need to complete a tax self-assessment to claim their full tax relief.
Which schemes use each tax relief method
1 Relief at source is the default, but some employers may have chosen to use NPA instead.
2 Large employers may be using the trust based scheme, which uses NPA (the GPP uses RAS).
You can find information about other schemes for automatic enrolment at the Pensions and Lifetime Savings Association (PLSA) Pension Quality Mark website.
If your client uses payroll software they should ask the payroll provider whether it'll work with the pension scheme they'd like to use.
Your client also needs to check that the software can carry out all the automatic enrolment tasks. For more information, go to check the payroll process.
Letters for staff
Your client has to write to their staff individually to explain how automatic enrolment applies to them, including how tax relief works. Some pension schemes may offer to do this for your client. If the scheme doesn't do this, we have letter templates which you or your client can use. Your client's payroll provider may also offer this service.
If English isn't the first language of all your client's staff, they may want to check whether the scheme can provide communications in other languages.
Information and support
Pension schemes may offer extra services such as working out who needs to be put into a pension scheme, processing requests to join the scheme or helping with ongoing duties. Discuss with your client what services they need.
It's important that the scheme your client chooses regularly sends communications to them and their staff.
Check that the scheme's communications clearly explain:
- how much money a scheme member has saved
- how their money is being invested and how the investments have performed
- what their projected savings will be at retirement
- how much of the money they pay into their pension will be taken in charges
- whether they can achieve the retirement they want at their current rate of saving
- whether they qualify for tax relief on what they pay into the scheme and if they have to do anything to claim it
Annual statements and other communications should help your client's staff to understand how they're progressing towards funding the retirement they want.
Any scheme that your client uses for automatic enrolment must have a default investment arrangement for staff who don't choose their own investments. Charges paid out of member savings in default investment arrangements must be no higher than 0.75% a year of the member’s fund.
Check whether your client's scheme needs to offer investment options that suit the particular needs of their staff, eg ethical funds or funds that comply with Sharia law.