How to plan for your nanny’s retirement
People who employ nannies, carers, cleaners or gardeners may soon have to make pension contributions on their behalf. This is part of the auto-enrolment pension programme designed by the Government to encourage all workers in the UK to save for retirement.
Some families may have to start making payments towards their home helpers’ pensions next month, while others will have up to two years to sort out a pension.
For people who know little about pensions this prospect can be a daunting one. Here, we walk you through who is likely to be affected, and what steps they can take to reduce these pension costs.
The first thing you’ll want to know is whether this affects you. Anyone who pays someone for cleaning, gardening or childcare is caught by these new rules. The key point is whether HMRC deems you an “employer”.
As a general rule of thumb, if you employ a nanny or carer directly, you’ll be caught by these new rules. This includes those who receive direct payments from their local authority or NHS, often to fund the care of elderly parents.
However, if you’ve employed a carer from an agency, then it will be the agency rather than you that is liable for these pension payments.
If you drop your kids off with a childminder, you also shouldn’t be affected by the new rules; most childminders are self-employed and offer their services to a number of different families.
Similarly, if you use a local gardener who offers their services to other households, then you won’t be caught by these rules, because you’re simply paying for a service. However, if you own a big estate and have your own gardener, then expect to make pension payments.
If you employ a nanny or carer you should already have a PAYE reference and be paying taxes and national insurance on their behalf. If you don’t have this, you will need to get in touch with HMRC.
Your staff will qualify for auto-enrolment if they are aged 22 and over, and they earn more than £10,500 a year before tax.
This means you must set up a pension scheme and make contributions on their behalf. They can opt out — which means you don’t have to pay – but it is against the law to encourage them to do this.
It is also against the rules to offer them a pay rise if they opt out – even if they say they would prefer this option. This is because the Government wants to make sure everyone is saving into a private pension, which should give them some financial independence in later life.
How much will it cost you?
You will need to contribute an amount equivalent to 1pc of their salary and collect a further 1pc from their wages and invest these in a pension.
However, contribution levels are rising: from October 2017 employers will pay 2pc and the employee 2.4pc. From October 2018 this will rise to 3pc for employers and 4pc for employees. (The employees’ contribution includes tax relief.)
These are minimum contribution levels and you can pay more if you would like to provide a more generous benefit.
This process is being phased in over the next two years. The Pensions Regulator, the watchdog for pension schemes, is currently writing to all the 1.4m businesses affected (including those employing up to 30 people), with details of their “staging date” — the date by which you have to have set up a pension.
There’s an option to postpone contributions for three months, but you still need to have the pension in place then.
If you’ve employed a nanny or carer more recently, your staging date is likely to be towards the end of this period. Otherwise, dates will be randomly allocated.
If you haven’t received a letter by the end of July, contact the Pensions Regulator at thepensionsregulator.gov.uk or by telephone on 0845 600 1011.
Thanks to a historic quirk, many nannies are employed on contracts which stipulate they must be paid net, which means you pay your nanny’s income tax and national insurance, on top of their agency’s tax and national insurance.
Kirsty Wild, the marketing manager of payroll agency Nannytax (nannytax.co.uk), says more of their customers are now moving to contracts where nannies are paid gross, which means they are responsible for their own tax and pension contributions.
She said: “Initially, paying an extra 1pc may not seem significant. But when contribution levels rise, you’ll be paying 7pc, rather than 3pc of their salary into a pension. This can be a more significant difference to the overall cost of employing a nanny.”
Choosing a pension provider
Once you’ve established you need to pay your employee a pension, you will need to choose a provider with which to set it up. Back in 2012, there were 23 providers offering autoenrolment options. Today there are 80 — so it isn’t always easy choosing the most appropriate scheme. You can consult an independent adviser, but they will charge for this service.
Keep costs to a minimum
Sean McSweeney, of Chase de Vere, says those employing a nanny or carer need to think about costs, investment options, and how easy these schemes are to run.
“The least risky option for many is to go with the National Employment Savings Trust (Nest), which is run by the Government,” he said.
The annual charges on Nest are low, but there is an additional levy to pay to recoup set-up costs. Mr McSweeney says this means it may not be as cost-effective for older workers, who many only be in the scheme for a few years.
Other big providers to consider include Now Pensions, The People’s Pension, Fidelity Life Master Trust and the Standard Life Master Trust. These schemes typically have competitive charges and accept customers contributing fairly small amounts each month.
You can contact pension companies directly, or alternatively, if you employ a payroll agency such as Nannytax, most will have systems in place to automatically deduct these pension contributions and invest them in your chosen scheme. Accountants may offer this service, too. Ms Wild says: “We can’t recommend a pension scheme, but once you nominate one, we can handle the rest of the process.”
Those that have taken direct payments from their local NHS authority may be able to get additional assistance from this service if this payment doesn’t cover additional pension contributions. After you’ve received your letter, with details of your staging date, you need to register up-to-date details online with the Pensions Regulator. If you are using an accountant or payroll company you need to register their details as well.