What does the national living wage mean to pensions?

NLW

It’s here, it’s being earned and it matters!

The National Living Wage (let’s call it NLW to spare space) is going to be paid to those over 25 and means a 50p an hour pay rise and It is expected to give 1.8 million workers extra in their next pay-packet.

From April 1st, if you’re 25 or over you have to be paid at least £7.20 an hour.

If you’re on a 35-hour week, this works out at £13,100 pa; if you’re under 25 you’re stuck on the National Minimum Wage (NMW) which is £6.70 per hour, your 35-hour week grosses you only £12,200 pa.

 

 Where’s the impact?

Not everyone will feel the impact immediately. Kate Upcraft, a payroll consultant points out

The NLW is only payable for the first pay period that starts on or after 1st April. So some folks won’t get it until May if say they are paid mid March to mid April.

Employers can of course pay early but many won’t because of the cost.

You also have to be 25 at the start of the relevant pay period. So if you were paid 1st-30th April and your 25th birthday is 2nd April you don’t get the uplift until May either.

And you shouldn’t take that 50p per hour figure for granted. The government adverts are very misleading saying everyone is getting 50p per hour. Only Panamanian tax evaders cshould rely on the gross figure!

The NLW’s impact will vary from region to region, even town to town. Among the “hotspots” is the City of Sheffield, where 22% of workers are set for a pay rise, according to the Resolution Foundation research.

However, workers in parts of London and the South East are likely to see little benefit. Just 3% of employees in the City of London will see an increase in their wages.

At the same time the Office for Budget Responsibility (OBR) has predicted that tens of thousands of workers could lose their jobs – or see their hours reduced – as employers try to compensate for the extra cost.

These big changes are speculative, but the detail isn’t speculative, it’s immediate and it’s important as it impacts on how people are paid, pensioned and your knowledge could save your company breaking the law!

 

What it means to the pensions of the low paid.

The most important impact on pensions will be on pension savings through auto-enrolment.

Those made redundant will not get contributions paid to them when they are out of work nor for any postponement period when they start work again (we underestimate the cost of changing employment in the new “AE world”).

There will be some who will become eligible for auto-enrolment by dint of their normal hours taking them over £833 pm or £10,000 pa. Many more with flexi-hours or with overtime will find they have that one good pay period (weekly, fortnightly or monthly) that make them eligible. While super-sleuth payrolls may be able to postpone people past these earnings spikes, most people will find them accidentally enrolled and will carry on getting and paying pension contributions unless they opt out.

Unfortunately, many of these marginally eligible, will find themselves in net-pay qualifying pensions where they get no Government Incentive (because they are below the nil-rate tax threshold). For them the “net pay anomaly” means they lose. Peter Shellswell, a First Actuarial colleague, has shared a worrying projection;

For a 25 year-old, whose future earnings are always below the personal allowance, then:

  • Under Net Pay, they could lose out on tax-relief over their working lifetime equal to around 1 years’ salary.

Ironically, those who find themselves auto-enrolled as a result of the NLW,  could be losing as much from their salary in pension contributions as they gain from extra pay. So for the person in Peter’s case study- not getting the Government Incentive would  amount to a 1% pay cut.

Action; if you run a net pay pension scheme and have low-paid earners -it’s time for a review.

 

 

What about employers?

 

While employers will worry first about the overall impact on their wage bill and secondly on the increased pension liabilities, they may have additional trouble with salary sacrifice.

 

The rule is that you cannot sacrifice (or exchange) salary for pensions (or anything else) so that the post sacrifice pay is below the minimum floor. With the floor increasing from NMW to NLW, pension deductions can kick in automatically and take employee take-home below the minimum amount.

 

This impacts big employers like M&S right down to “Flo the Florist and the Fish and Chip shop owner”. Most employers are going to have to make sure payroll knows what it’s doing and put in place controls. With two tiers of minimum earners, a vexatious problem becomes fraught and many employers may start to think salary sacrifice more trouble than its worth.

 

salary sacrifice 3

What should employers do?

We hope that employers welcome NLW and we don’t want the complications I’ve mentioned in this article to put employers off properly funding pension contributions for all staff. But I hope this article has highlighted the need to pay attention to the pension – especially if you are employing low-paid staff.

 

We recommend that all employers have some in-house pension expertise (preferably a pension committee which provides oversight on issues such as this).

 

Action; If you’re a boss struggling with pensions (as most of us do), then now may be the time to appoint an adviser to help you keep up to date on matters like this.

 

First Actuarial would be happy to help and we’ve got different levels of pension service we can offer employers to suit differing employers needs and budgets.

 

For more information and a quick quote, call Antonia Balaam on 01732 207 517, Simon Redfern on 01732 207 577 or Ian Barrett on 0161 348 7478.

About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
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1 Response to What does the national living wage mean to pensions?

  1. Kate Upcraft says:

    Just to clarify, as even Acas don’t make it clear in their NLW guidance, the NLW is only payable fur the first pay period that starts on or after 1st April so some folks won’t get it until May if say they are paid mid March to mid April. Employers can of course pay early but many won’t because of the cost. You also have to be 25 at the start of the relevant pay period. So if you were paid 1st-30th April and your 25th birthday is 2nd April you don’t get the uplift until May either. Good point about tax and Ni too. The government adverts are very misleading saying everyone is getting 50p per hour. Only Panamanian tax evaders could rely on the gross figure!

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