Big changes to how millions of people across the UK will save for their retirement are coming. Here’s what you need to know about the NEST pension scheme and how it will affect your finances.
With automatic enrolment starting later this year, the introduction of NEST pensions (officially named the National Employment Savings Trust) could bring about some big changes to the way you save for retirement.
Here’s what you need to know about the new scheme and how it could affect your finances.
What is NEST?
NEST is a new defined contribution occupational pension scheme backed by the government.
Both you and your employer will contribute to your pension while you are working.
Then, when you retire you’ll be able to use your NEST pension pot to purchase an annuity that will provide with a retirement income.
Your pension contributions will be deducted via salary sacrifice so you won't pay any tax or National Insurance on the money you contribute.
What's more, the money paid into your pension by your employer will need to be in addition to your salary so effectively by participating you're earning a little more than you otherwise would.
Millions of people in the UK are likely to use NEST as the home of their retirement savings and many will be automatically enrolled in the scheme when changes to UK retirement laws come in to place in the autumn.
Who will be auto enrolled?
If you are over 22 years old, earn enough so that you pay income tax (the minimum is currently £7,475), and don’t have an existing pension scheme, you will automatically be enrolled in a NEST-qualifying pension scheme by your employer.
If you are between 16-75 years old and earn over £5,035 a year, you can ask to join your employer’s NEST pension scheme. Once you’ve done this your employer will have to pay the minimum contribution to your pension pot.
For more information on who can enrol in the NEST scheme, visit the NEST website.
When will automatic enrolment start?
Automatic enrollment will start from 1st October, 2012 although the exact date you join will depend on the size of the company you work for.
This is because entry into the scheme will be on a staggered basis with larger companies participating before smaller firms, business with less than 30 employees will be last in line and not obligated to complete enrolment until April, 2017.
To find out if and when your company will enrol you in the scheme contact your HR department or visit the Pensions Regulator’s website.
While it’s likely most employers will choose to enrol their employees in the NEST pension scheme they are able to use an alternative providing the pension scheme they choose is government approved.
You will need to speak to your company’s HR department to find out the particulars of the pension scheme they plan to enrol you in.
How much will you have to pay?
The government has set compulsory minimum pension contributions for anyone that’s enrolled in NEST. These dictate how much both you and your employer will have to pay into your pension once the scheme begins.
Initially you’ll have to contribute 2% of your salary and your employer will contribute an additional 50% of this as a minimum. However, the amount you will need to contribute will gradually increase.
Here is a breakdown of the minimum contribution levels you will have to pay:
- October 2012 to September 2017 – 2% of your salary (of which your employer pays 1%)
- October 2017 to September 2018 – 5% of your salary (of which your employer pays 2%)
- October 2018 – 8% of your salary (of which your employer pays 3%)
In certain circumstances, namely if you are self-employed or a worker without qualifying earnings (i.e. below £7,475), the minimum contribution requirements will not apply.
This means that you don’t have to pay into the pension scheme set up by your employer, or set up your own pension scheme if you’re self-employed. However, you are able to join the NEST scheme if you wish, this may be worth considering if you don’t have any retirement savings elsewhere.
How much will NEST cost?
As with any occupational pension, there will be an annual management charge deducted to cover the cost of managing your funds.
At present this annual charge has been set at 0.3%.
However, there will be an additional annual 1.8% fee applied initially to cover the set up cost of the NEST scheme.
This additional charge is only temporary but exactly how long this additional charge will be applied has not yet been confirmed.
For a full breakdown of NEST charges and an illustration of how much it might cost in real terms visit the NEST website.
To compare the costs of the NEST pension scheme to other personal pensions you can use our pension comparison table which lists the current management fees of all the main pension funds.
Will you be able to control where your money is invested?
Initially, any money paid into a NEST pension will be amalgamated in a default fund which will then be invested in a rane of different companies, industries and sectors.
The exact fund your money will be paid into is likely to be based on your estimated date of retirement. This is so the investment choices can be tailored to suit your pension needs (either to maximise growth or to protect your capital) depending on how soon you're likely to want to draw your money.
There are plans to introduce a number of different funds so you’ll eventually be able to choose where their money is invested – these are likely to include ethical, environmental and social funds.
More details about the various funds you can invest in through your NEST pension will be released closer to the October, 2012 launch date.
Can you opt out of NEST?
Although employers will be obliged to enrol any eligible staff into a pension scheme you are still free to opt-out if you decide that you don’t wish to participate.
However, if opting out of the NEST programme will leave you without any provisions for your retirement you will need to think carefully about how you will pay for the lifestyle you want when you stop working.
If you are unsure if you should be saving for your retirement and want more information, read our guide: Should I Get a Pension?
What happens if you move employer?
One of the perceived benefits of saving for retirement through the NEST scheme is that you’ll be able to pay into it throughout your working life regardless of whether you switch employers.
Of course, every time you change job roles or move employers it makes sense to consider your pension arrangements, especially if you new employer offers an independent pension plan and offers to match your contributions above those outlined in the NEST scheme.
Can money be moved in & out of NEST?
The short answer to this question is no.
At present there are no plans to allow you to transfer money in or out of a NEST account, unless very specific circumstances are met.
Initially this means once you’ve paid money into a NEST pension scheme it’s locked there until you retire.
The government has announced that it will review this restriction in 2017.
Can you save in NEST if you are Self Employed?
Although automatic enrolment will not impact self employed workers, if you do work for yourself you can still save for retirement using NEST.
You will still receive the same tax benefits as employed workers but won’t be bound by minimum contributions limits so you’ll have more flexibility.
However, as no one will be making contributions on your behalf you should consider all your retirement savings options before you sign up. Take a look at our Action Plan: How to save for retirement for more information on your options.
For more information on using NEST when you are self employed visit the NEST website.
When will you be able to access your NEST fund?
The NEST scheme has been set up specifically to encourage everyone to save for their retirement. For this reason any money you pay into your NEST pension cannot be accessed until you 55th birthday.
Once you retire you’ll be able to draw 25% of your pension pot as a tax free lump sum – this is the same as with any other personal pension fund.
Whatever you decide to do with your NEST fund you must take all of the money out of the scheme by your 75th birthday.
For more information on what to do with your pension fund you can read our guide: Should You Take a 25% Tax Free Lump Sum Out of Your Pension Fund? or visit the NEST website.
