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Matthew Frain

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Feathering the NEST – time to start now

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There is some confusion over the state of pensions in the UK and with the change of government, where does the NEST scheme stand? Navigate the way forward with this guide.

It has long been suggested that there is a sizable retirement savings gap in the UK. What does this mean – well basically, too many people are making little or no provision for income after they work, probably expecting that the state will look after them, that they will inherit the family fortunes or just not giving it a second’s thought. The truth is: many of these people could end up living around the poverty line.

So how big is ‘sizable’? There seems little point is trying to put a monetary value on this. Big numbers tend to lose significance at some point as they are beyond comprehension to most of us.Let’s look at it in terms of people: the UK population is currently around 62m.The Government estimates that around 7m are not making adequate provision for their retirement, which would equate to about one in every nine people.

But, consider this: round 19% of the population are below the age of 16 (the vast majority will not have retirement savings in place), and 16% are above 65 years of age (of which most will have retired).Taking this into account, the figure could be closer to one in every six people not making adequate provision for their retirement.

The Government believes that the best way to tackle this problem is to establish a new low-cost national pension savings scheme: the ‘National Employment Savings Trust’ (NEST) (previously known as Personal Accounts) will be introduced from October 2012.
 
NEST was created to make it easier for low- to middle-income workers to access employer-sponsored workplace pension schemes and represents a significant shift in private pension provision as all employers and all eligible employees will have to pay into NEST, unless they already contribute to an exempt ‘qualifying workplace pension scheme’ (QWPS), or the employee chooses to opt out.

Auto enrolment
All employees aged between 22 and the State Retirement Age must be automatically enrolled into NEST or a QWPS by the employer on the first day of their employment, although the employee can subsequently choose to opt out. Anyone choosing to opt out must be automatically re-enrolled every three years at their employment anniversary date. Self-employed and unemployed individuals will be able to join the scheme on their own account.

Whilst they are yet to comment on NEST specifically, the newly-formed coalition Government have emphasised the importance being placed on auto-enrolment. Their ’Programme for Government’ document published 20 May 2010 stated “We will simplify the rules and regulations relating to pensions to help reinvigorate occupational pensions, encouraging companies to offer high-quality pensions to all employees, and we will work with business and the industry to support auto enrolment.”

Contributions
Employees will have to contribute 4% of their qualifying earnings (currently earnings between £5,035 and £33,540), with 1% tax relief added by the Government. Qualifying earnings are total earnings from all employment and will be revalued annually.

Employers will have to contribute 3% for every eligible employee who does not choose to opt out. The contributions will be phased in so that in year one employees and the employer will only have to make contributions of 1% each. In year two contributions will increase to 2% employer and 3% (gross) employee, before reaching the full contribution level in year three.

To complicate matters further, it is intended that NEST will be introduced in stages with larger employers (determined by number of employees) having to adopt the rules first, and smaller employers will then follow. This will take place between October 2012 and September 2016, during which time all employers will stay at the year one contribution stage (ie 1% employer and employee contributions) before moving on to years two and three respectively. This means that some employers will be at the year one contribution stage for up to four years and full contribution levels will not be payable until October 2017.

NEST limitations
It is important to remember that the NEST scheme is aimed at providing access to pension provision for low to middle earners and is not designed to be an all-singing, all-dancing scheme, suitable for all.

NEST has a number of limitations in comparison with company pension schemes:

  • There will be a limited choice of investment funds, probably including ethical and environmental options and also a default fund for those who do not wish to make a choice
  • Advice will be limited and generic
  • Retirement options will be limited to annuity purchase
  • Transfers into and out of NEST will be prohibited until at least 2017.

What help is available to employers?
The NEST regulations make up some of the most sweeping pension reforms in modern memory, with the introduction of auto enrolment and compulsory contributions. Employers who offer a QWPS, and who auto-enrol employees into it, will be exempt from the requirement to offer NEST, and it is vitally important that they are made aware of this.

As the launch date for NEST gets ever closer, it appears clear that employers, many of whom have little or no knowledge of the new requirements placed upon them, are going to get little information and no advice from the Government.

It is therefore important for employers to obtain independent financial advice on how their business with be affected by NEST. The Jelf Group can provide nil-cost reviews of any existing pension arrangements, financial education, bespoke communication material and member communications and can relaunch or set up exempt pension schemes as appropriate.

Matthew Frain is Combined Benefits Consultant at the Jelf Group

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