Providing they meet certain criteria, all umbrella company contractors will be automatically enrolled into a pension scheme when they join.
Once enrolled, contractors can choose to opt out and manage their pension themselves, or carry on with the umbrella company’s scheme. If they continue, the umbrella company will make a minimum contribution to the pension based on the contractor’s earnings, along with a contribution from the contractor themselves.
The exact contributions will be determined via legislation, but starts at a minimum of 2 per cent, with a minimum of 1 per cent to be paid by the employer, increasing over time.
The process of auto-enrolment
All eligible contractors will be auto-enrolled in their umbrella company’s pension scheme. The criteria for eligibility are simply that the contractor must be between 22 years of age and the state pension age, that they work in the UK and have gross earnings of over £10,000 per annum.
As mentioned earlier, once an umbrella company contractor has been auto-enrolled in their service provider’s pension scheme, they can choose to opt out. However, contractors cannot arrange to opt out in advance and must wait until they have been enrolled in order to do so.
Furthermore, different companies will have different mechanisms through which contractors can opt out. Usually this will be via a phoneline, online form or through a letter.
Contractors should be wary of pressure from their umbrella company to opt out, as some companies may look to save administration and pension costs by encouraging their contractors to not use their scheme. This goes against pension legislation and can result in action from the Pensions Regulator.
The implications of auto-enrolment
There are numerous advantages to remaining in an umbrella company pension scheme. Primarily, of course, to benefit from having a funded pension, with employer contributions, that allows you to save tax and National Insurance on contributions made. A company pension scheme also saves you time on the admin that managing your own would require.
However, an umbrella company pension scheme can have some drawbacks, particularly in the case of contractors with many clients who may work through multiple providers. In this instance, the contractor would have multiple pension pots, which is not a particularly efficient way of saving a pension.