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Whether you’re a fast-growing business, or one that’s been around for donkey’s years, if you have one or more eligible employees paid through a PAYE scheme then you’ll need a workplace pension. If your business has been set up since April 2012, then the deadline for setting up your pension scheme will be some time after May 2017, but if your business was established before April 2012 your staging date will be within the next 12 months..! If you haven’t thought about it yet, now is the time to start planning.
There’s been much talk recently about the new Lifetime ISAs, or ‘LISAs’, which the Government plans to introduce from April 2017. LISAs can only be set up for individuals aged under 40 and their main purpose is to provide a tax efficient savings fund with which to buy your first property. Each year, up to age 50, you can pay up to £4,000 into a LISA and, for each £4 paid in, you’ll receive a £1 bonus from the Government. You can draw on the fund tax-free before age 60 to purchase a first property costing no more than £450,000.
Many in the pensions world are wondering why the Government is introducing the LISA whilst auto-enrolment is in full swing – will employees opt out of their pension scheme and set up a LISA instead? I, for one, doubt it. A workplace pension and a LISA are very different beasts and there is clearly a demand for both. People will naturally have different savings priorities over their lifetime.
A quick comparison of each form of saving reveals that, based on the same employee contribution, a workplace pension will provide you with a higher income to draw down on in later life, even accounting for the fact that some of your pension income is taxable, whereas LISA income is tax free. This is largely because of the compulsory employer contribution required for a workplace pension and the tax relief that you receive on your own contribution.
Of course, you won’t be able to access your pension until you reach age 55, so youngsters must approach pension saving as a long term commitment. But if you decide not to use your LISA for a property purchase and want to cash it in, there is an expensive 5% penalty charge to pay and you’ll lose the 25% bonus you’ve received from the Government. So pro’s and cons of each.
Workplace pensions and LISAs should co-exist quite happily as long as employees are well informed and make the right choice for them.
Getting the right advice about workplace pensions is important for employers and employees alike. If you would like to talk through your circumstances with an auto-enrolment expert, please give us a call on 0800 160 1233. We’ve got lots of useful information and guidance on our website if you need it: http://www.aefasttrack.com/
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"We wanted to embrace Auto-Enrolment to get good pensions in place for our team early. We interviewed a couple of companies to assist us, and Sarah gave a very good case for her company. We are confident that we made the right decision! From selecting the right provider, through to setting up the systems and even presenting to our staff, Sarah and her team were excellent. I don't hesitate recommending the Auto-Enrolment Bureau to anyone looking to enrol their company. My only words of advice are, do it early!"
Richard Hardstaff, Director, Polydron (UK) Ltd