People overlook pension funding options which may be available to higher earners without breaching the auto-enrolment rules. Here we look at a pre A-Day concept applying to the new pension regime and funding.
Auto enrolment is the new government sponsored pension scheme where any qualifying individual would need to either be a member of the government sponsored NEST (The National Employment Savings Trust) or an equivalent pension scheme set up by their employer. Alternatively they could join an appropriate qualifying scheme (i.e. external non-auto enrolment scheme that meets a fixed criterion). The purpose of these schemes is to ensure that every qualifying individual has access to membership and will be saving towards their retirement in the future. The overall levels of minimum contributions are only set at a total of 8% of qualifying earnings (4% employee, 1% government tax relief and 3% employer) which come in over a series of staging dates. Information can be found on The Pension Regulator website here.
It is possible for an individual to opt out of such a scheme to run their own “non NEST” pension but they would be automatically opted back in after three years and so would need to opt out again at this point to ensure that they were not automatically set to join the scheme. This has the potential to be complex and there is a strong likelihood the people would forget these dates and deadlines.
The Collective Retirement Account is not an auto enrolment scheme nor is it a qualifying alternative scheme.
It is also worth noting that auto enrolment has an earnings threshold of £42,385 for the current year and it is only earnings below this threshold that are covered by auto enrolment and need to be funded under these rules.
Generally speaking high earners and company owners/directors will have pension funding entitlement through their contract of employment/earnings which could be well in excess of the NEST funding requirements. In these cases the employee would have the choice of either paying a larger amount into the auto enrolment scheme, or alternatively utilising something that has been historically called a top hat scheme.
All a top hat scheme refers to is a pension scheme on top of any standard pension scheme that is being offered to the general employees (i.e. top of the pile or on top of the head – so top hat). Historically speaking this was normally where an employee was a member of an occupational pension scheme where they had no control over the investment of their funds or the style of benefits that could be taken. On this basis they would have used the extra pension funding to invest into a more flexible style of contract. This used to be something like an executive pension scheme – a money purchase scheme where they have direct access to the pension fund investments they can use and maybe some option of how and in what format they take their pension benefits. An alternative to give wider investment choice would be a Small Self- Administered Scheme.
In the current post A-Day world the same scenario can be seen. Auto enrolment would be seen as the basis scheme where there are likely to be restrictions due to the charging structure and style of the scheme. The Collective Retirement Account could be seen as the top hat scheme and have significant benefits in terms of flexibility and options such as phasing, rebalancing, large investment options, flexi-access drawdown, flexible death benefits etc.
For higher earning individuals this can be seen as a very appealing opportunity to fund those pension contributions either in excess of the minimum total of 8% of the earnings threshold or just relating to higher earnings and bonuses.
Although there is nothing prohibiting the client from electing to opt out of the auto enrolled scheme every three years and fill in all the necessary paperwork to remain opted out for an additional three years, the use of the “top hat” scheme and the CRA is an efficient alternative which can run alongside the government instigated scheme with no interference until the client wishes to take benefits.
You would suggest anyone who is in a position of responsibility within the company or an owner would expect to have larger contributions made into a pension scheme than the total of 8% (4% employee, 1% HMRC and 3% employer) which is only £3,390.80.