Managing Auto Enrolment Opt Outs and Re-enrolments
How does an employee opt out of a workplace pension scheme?
An employee can opt out of a workplace pension scheme at any time. While it is preferable to remain in the scheme to obtain the benefit of the employer’s pension contributions and tax relief, for those individuals with significant debt, retaining 100% of their salary may be preferable. Conversely, someone with an existing pension plan may decide to opt out, particularly if the value of this plan is high. This is because additional contributions through auto enrolment may put the total value of their pensions over the lifetime allowance (currently £1,073,100), at which point a tax charge will apply.
To opt out of a workplace pension scheme, the employee must complete an opt-out form which should then be returned to the employer. An employee can re-join the scheme at any time.
How does re-enrolment work?
Every three years, an employer must re-enrol all employees meeting the eligibility criteria back into the workplace pension scheme. As part of this process, the employer must assess all employees who have opted-out of the pension scheme, or have reduced contributions below the minimum level, and re-enrol them. Employees must be advised that they are going to be re-enrolled (and what their rights are if they want to opt out) within 6 weeks of the re-enrolment date. Finally, the employer must make a new declaration of compliance to the Pensions Regulator to confirm compliance with the pension regulations.
What are the consequences for not complying with auto enrolment legislation?
The Pensions Regulator is permitted to investigate any company that it believes may not be complying with auto enrolment legislation. As part of this, they can issue formal notices requesting information, carry out onsite inspections, or issue statutory notices where an employer has not met its duties.
Statutory notices include:
- A Fixed Penalty Notice, with a fine of £400;
- An Escalating Penalty Notice can charge £50 to £10,000 for every day that an employer has not met its duties. The amount of the daily charge is determined by the size of the PAYE scheme;
- A Prohibited Recruitment Conduct Penalty Notice, which carries a maximum fine of £5,000;
- An Unpaid Contributions Notice, which mandates that the employer must pay all unpaid contributions plus interest;
- A Civil Penalty Notice for non-payment of contributions, up to £5,000 per individual and £50,000 per company.
Should Penalty Notices be ignored, the Pensions Regulator can take legal action, with the maximum penalty being two years’ imprisonment for the director(s) of the business.
In the first quarter of 2020, the Pensions Regulator issued 9,913 fixed penalty notices (of £400), and 3,571 escalating penalty notices.
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