The Government is introducing number of key changes to the pension landscape from 2012. These include the introduction of a new trust-based pension scheme – the National Employment Savings Trust (NEST) and pension scheme auto-enrolment for employees.
The NEST pension scheme is meant to be a new low cost pension scheme designed to meet the savings need of low-to-medium earners. Starting in 2012 employers will need to enrol their employees that are not already a member of a pension scheme into either an occupational pension scheme or the new NEST scheme.
How the NEST scheme will work
The NEST will be a low cost defined contribution scheme, with contributions paid by both employees and employers. The contributions for employees will be 4%, with 3% for employers. The NEST scheme will create an individual pension fund for each member. It will be made up from employee and employer’s contributions, tax relief (1%) and investment returns (less any fees).
The fund will be invested in stocks and shares, and other investments. The NEST will have a variety of investment funds to choose from.
When the holder finally gives up work, the accumulated funds will be used to buy an annuity to provide regular pension income.
It is anticipated that the charges for the NEST scheme will include an annual management fee of 0.3% of the value of the fund. There will also be an initial 2% contribution charge to cover the set-up costs of the NEST scheme.
The amount of income in retirement that a holder gets is determined by the amount of money paid in, the performance of the invested funds and the charges. It will also depend upon the type of annuity purchased and the annuity rate used to convert the pension pot into regular income.
The rules governing the NEST scheme
Starting in October 2012, some employees over the age of 22 and earning more than £5,035 a year will be auto-enrolled in either a company pension scheme or the NEST scheme, assuming they are not already a member of a pension scheme. The employee and the employer will be required to make contributions to their NEST pension savings. However, auto-enrolment and the levels of contributions will be phased in between 2012 and 2017 to allow employers to prepare for the changes.
Members of the NEST scheme can continue to save through it if they changes jobs – even if their new employer doesn’t offer the NEST scheme. Pension transfers will not be allowed with the NEST, though this policy should be reviewed in 2017.
Although they are not required to auto-enrol into a pension scheme, self-employed workers can join the NEST.
Workers that do not want to join a pension scheme – be it the NEST or a company scheme – can opt out the scheme by giving notice during the opt-out period.
The advantages of NEST
The NEST will give workers a low cost way to save for their retirement and benefit from employer contributions. This can be use to supplement their State pension and boost their overall income in retirement.
The NEST will provide several funds for investors to choose from giving them flexibility in line with their attitude to risks and rewards.
Disadvantages of NEST
As with all defined contribution schemes the amount of money an individual will get on retirement will depend on the amount of contributions made, the returns generated and the annuity they buy on retirement. It will be their responsibility to make sure their pension savings are adequate for their retirement expectations.
The minimum contributions levels are quite low and may create a false set of security, as total contributions of 8% of salary may not be enough to provide for a comfortable retirement.
