The pension landscape in the UK is facing a crisis – people are living longer, but too many people are not saving adequately for their retirement. In particular, individuals on low-to-moderate incomes are not putting enough money aside for their retirement years.
To encourage more of us to save for retirement the Government is changing the rules governing occupational pensions. It is introducing two key amendments – auto enrolment for employees and the National Employment Savings Trust (NEST). Together these reforms should encourage more people to start saving for their retirement via a pension. More importantly, the reforms will mean that more people will have other income to supplement the State Pension and benefits in retirement.
The introduction of auto-enrolment
Currently, many workers do not join their employer’s pension scheme and so miss out on valuable pension benefits. Auto-enrolment of staff is designed to overcome this problem.
Under current legislation auto-enrolment in occupational pensions will be introduced in October 2012. The new rules require employers to auto-enrol all employees earning more than £5,000 per annum into a qualifying defined benefit , defined contribution company pension scheme or NEST pension plan.
To enable smaller businesses to prepare for the administration changes and additional costs associated with this change, auto- enrolment will be phased in over a four year period. It will start in October 2012 for companies with more than 120,000 employees, with other firms being phased-in to their duties depending on their size and PAYE reference numbers.
The rules also require that total pension contributions should be a minimum of 8% of an employee’s earnings. Employers must make contributions of at least 3% of the employee’s gross earnings. In which case, employees should make minimum pension contributions of 4% with a further 1% added as tax relief by the government.
If employees do not want to participate in the occupational pension scheme they can opt-out of it.
NEST – the low cost pension scheme
The National Employment Savings Trust (NEST) is meant to be a low cost pension scheme. It is aimed at low to moderate earners, aged 22 to 65, who are not yet a member of a pension scheme. The Government believes that up to 10 million workers may end up joining a NEST scheme.
The NEST scheme is also known as the Personal Account and is due to be launched in October 2012 and run alongside the introduction of auto-enrolment. It will be a defined contribution personal pension scheme. Contributions from the member and their employer will be invested in a managed fund until the employee takes retirement. The employee will then use their accumulated pension pot to buy an annuity, which will give them regular income for the rest of their life. One advantage of the NEST scheme is that workers can take the pension scheme with them if they change jobs.
Workers will be required to make pension contributions of at least 4% of their gross earning into their NEST scheme, with their employer adding at least 3% and tax relief contributing a further 1%.
The charges and annual fees for a NEST pension scheme are meant to be significantly lower than typical personal pension, making them more affordable to the average worker. NEST will offer a few different funds to choose from as well as having a default pension fund.
Changes to pension in 2012
With people living longer and too many people relying on just the State Pension the Government has been forced to try to promote more of a saving culture in Britain. From 2012 the Government plans to introduce auto-enrolment into a pension scheme for all workers, with mandatory employee and employer contributions. At the same time it also plans to launch a new pension scheme – NEST. It is hoped that the low cost and uncomplicated structure of the NEST pension scheme will make it more accessible to workers on low-to moderate incomes and so encourage them to save for their retirement.
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