How to easily set up and manage a successful workplace pension scheme

Les Roberts, Senior Content Manager at Bionic
By Les Roberts, Senior Content Manager

Getting your business off the ground is one thing, but making sure that you’re setting your employees up for their future is another.

As an employer, you must make sure that you set up a workplace pension scheme for your employees so they can reap the rewards of their hard-earned cash in their later years. 

But, how exactly do you set up and manage a successful pension scheme? With this handy Bionic guide, we’ll walk you through everything you need to know — from the different types of schemes to who makes the contributions — we’ve got you covered.

What is a pension scheme?

A workplace pension scheme is a way of saving money for retirement through contributions that are taken from wages. As an employer, you must offer a pension scheme to all of your employees by law.

If an employee is eligible for automatic enrolment, you must make contributions to their pension. If an employee isn’t automatically enrolled, they can still join the scheme and you can’t refuse this. 

A small business owner sits with an employee near a laptop to talk throuhg their workplace pension

What is auto-enrolment?

All qualifying employees must be enrolled in a pension scheme by default. Under automatic enrolment schemes, you’ll make contributions based on the employee's total earnings between £6,240 and £50,270 a year before tax.

Their total earnings include:

  • Salary or wages
  • Bonuses and commission
  • Overtime
  • Statutory sick pay
  • Statutory maternity, paternity or adoption pay

Employees do have the right to opt areout, but it has to be their own decision and they mustn’t be pressured to do so. 

Some employees may consider to opt-out because they’ve already saved close to their lifetime allowance — which is a maximum of £1,073,100 (correct as of October 2022) — otherwise, they could receive a hefty tax charge on anything more than this. 

Who do you enrol in the pension scheme?

Whether employees work full-time or part-time, if they meet the auto-enrolment criteria then they must be in the pension scheme. The criteria are:

  • They’re at least 22 years old but under the State Pension age
  • Earn more than £10,000 a year for the 2022/23 tax year
  • They work in the UK
  • They aren’t already enrolled in a suitable pension scheme

If employees earn less than £10,000 but more than £6,240, they can ask to join the scheme and you can’t refuse. Once employees are enrolled in the pension scheme, you must:

  • Pay at least the minimum contributions to the pension scheme — These must be paid on time, typically by the 22nd of each month.
  • Let employees ‘opt out’ of the scheme if they ask — Money must be refunded if they’ve paid in and they opt out within 1 month.
  • Let employees rejoin — If they’ve opted out, all employees must be allowed to rejoin at any time if they please.
  • Enrol back in every three years — If employees opted out, every three years they’re eligible for automatic enrolment. 

What are the different types of pension schemes?

In the UK, there are two different types of pensions: defined benefit and defined contribution schemes. 

Defined benefit pension schemes

Sometimes known as ‘final salary’ or ‘career average’ schemes, this is the most common type of workplace pension and will be arranged by you, the employer. 

The amount that employees will receive when they retire will be based on:

  • How long they’ve been a member of the pension for
  • Their earnings

When employees retire, they can take 25% of their pension as a tax-free lump sum. The rest they’ll receive as a regular income, which they’ll pay tax on.

Defined contribution pension schemes

Also known as ‘money purchase’ schemes, the employer decides which type of scheme the employee is offered. 

In a defined contribution scheme, the pension pot is put into various types of investments — such as shares in the company — and is expected to grow over time. 

The pension pot is typically invested in this way because, in the long run, it gives better returns than a savings account. If the value goes down in the short term, it’s likely to recover in the long term. 

The amount that employees get when they retire usually depends on certain factors such as:

  • How much has been contributed
  • How long the employee has been contributing for
  • How well the investment has performed

25% of the pension pot will usually be tax-free, but the pension provider will also take a small percentage as a management fee. 

How to set up a pension scheme

When setting up a pension scheme, it’s so important that you make sure you follow each step correctly. At the end of the day, a simple mistake can cause a huge setback.

1. Make sure staff can be enrolled in time

If you’re just getting your business up and running, or you’re taking on staff for the first time, you need to make sure that your pension scheme is ready to go from the date the first employee walks through the door.

If this isn’t practical and you’re a new business, you have a three-month grace period to get the scheme in place and set up.

2. Choose a scheme

When you’re trying to get your head around pension schemes, it can be tough. But, make sure that you consider each option carefully. 

Many schemes also offer extra benefits — like online dashboards for easy access — so make sure that you shop around to find the right one to support your business. 

3. Write to staff to inform them

You must formally write to all members of staff who are eligible for the scheme and let them know that they’ve been enrolled. 

4. Set up employer and employee contributions

Decide how much you want to contribute as an employer, and then arrange for the employee contributions to be taken out of staff wages. The minimum amount an employer can pay is 8% of staff earnings.

If you need some help in knowing how much you and your employee should contribute, you can speak to your accountant. 

If you don’t have one, you can learn more about hiring an accountant with our handy guide.

5. Notify the Pensions Regulator

No later than 5 months after you’ve enrolled your first member, you must inform The Pensions Regulator that you’ve set the scheme up and it's compliant. You can inform them at the pension regulator website.

If you fail to inform them, you may face enforcement action that can include compliance notices and hefty penalty fines, so it’s best to let them know as soon as possible.

6. Automatically enrol new staff

When your employees receive their welcome documents, it’s a good idea to include the pension scheme information in this. 

When new staff join the team, make sure that they’ve been automatically enrolled and begin to make payments after three months or after their probation period has ended. 

Who contributes to a workplace pension?

As an employer, you must contribute to your employees’ pension, and each employee may also pay into their own. 

How are minimum contributions worked out?

The minimum contribution is made up of money from your employee’s pay, money contributed by the employer and tax relief from the government. If the total minimum of your pension is based on qualifying earnings, then the contributions will be worked out as:

Tax relief from the Government1%

What happens if I don’t comply with the rules?

As an employer, you must meet all of the legal duties when it comes to automatic enrolment for your employees. 

If you’re late in your automatic enrolment duties, The Pensions Regulator will expect you to pay any missed contributions. If you’re not following the rules, they can investigate any concerns raised internally or by staff and reprimand you for this. In the event of persistent and deliberate non-compliance, The Pension’s Regulator can issue increasing penalty notices of up to £10,000. 

Get your business on track with Bionic

The world of pensions can be confusing, but it’s so important that you set up and manage the scheme to do the right thing for your employees. 

Whether you’re trying to understand who makes the contributions, by how much or simply wondering how to set the scheme up, our guide can help. 

Get in touch today with the Bionic team to discuss your needs or get more information on business finance