Most of us aren’t saving enough during our working lives to afford retirement. According to numerous surveys, a substantial proportion of us plan to rely on property, inheritance, state aid, or even a potential lottery win to see us into a care-free, job-free old age.
The UK’s working population is set to be outnumbered by over-65s within 30 years. The number of employer final salary pension schemes, which gave workers a good idea of the set amount they would receive in retirement, has declined dramatically in the past 10 years; and there are around 750,000 employers not currently offering a pension scheme to their staff.
Politicians and pensions experts have long agreed something needs to be done to better prepare Britons for retirement.
So, from its launch in spring 2011, an estimated 7 million workers who are currently not saving for retirement will be automatically enrolled into the government’s new National Employment Savings Trust (NEST).
This means workers who have been employed for more than three months and earn over £5,715 per year (£110 per week) will be automatically signed up by their employer to NEST or, if it already offers one, an occupational pension scheme that at least matches minimum criteria of NEST.
If you earn less than £5,715 per year or are under age 22 or older than the state pension age (currently 65), you can decide to opt in to NEST and your employer will legally have to make a contribution to your pension savings through the scheme. You can request to opt in to NEST as soon as you start work (or within the first three months of employment) but if you do nothing you will be automatically enrolled into a pension scheme by your employer at the end of month three.
The annual limit on contributions, which will be made up of employer and employee contributions, is £3,600 per year. However, NEST trustees say there will be “headroom” for low to moderate earners to pay more than that level. More details are due to be released closer to the launch date.
What does your employer pay?
If you are enrolled into an occupational pension scheme – but not NEST – your employer does not have to make a contribution. If you are enrolled into NEST, it does. These rules apply to all UK employers, irrespective of company size.
There must be a minimum contribution of 8 per cent going into the occupational pension scheme or NEST. This can be split between employer and employee contributions.
The level of contributions from employers varies from 1 per cent to 5 per cent depending on the “worker’s qualifying earnings”, which the employer will work out for you.
What do you pay?
This, again, depends on your “qualifying earnings” and contributions will be phased, starting from 1 per cent between October 2012 and September 2016, then 3 per cent from October 2016 to September 2017 and 5 per cent from October 2017 onwards.
The employer’s contribution will mean a phased overall pension/NEST contribution starting from 2 per cent of annual salary, rising to 5 per cent and then reaching 8 per cent by 2017.
Tax relief of 0.2 per cent to 1 per cent is added to the phased contributions above, boosting the savings value.
Auto enrolment does not mean you are forced into a pension; there is the option to opt-out of a work pension scheme or NEST. To do this, you will need to give notice during the formal notice period. If you have already been enrolled and had contributions taken from your salary, they will be refunded to you.
No transfers in or out of NEST are allowed (except in specific limited circumstances), though this will be reviewed in 2017.
NEST contributions will be invested on your behalf by the NEST Corporation, the trustee body with overall responsibility for running the scheme. It is a non-departmental public body that operates at arm’s length from government and is accountable to Parliament through the Department for Work and Pensions (DWP).
Likely returns from this investment are hard to predict. In its October review Making Automatic Enrolment Work, the DWP stated: “Will people who are automatically enrolled get a good return on their contribution? Overall, returns to pension savings are complex, affected by what levels of return from saving are thought acceptable, investment returns, annuity rates and the interaction with the tax and benefit system.”
The investment aims to be low-cost with a 2 per cent charge on the value of each contribution and an annual management charge (AMC) of 0.3 per cent of the value of the fund. This is significantly less than the typical 5 per cent initial fee and 1.5 per cent AMC charged to stock market investments within ISAs, for example.
NEST and NEST Corporation will be regulated by the Pensions Regulator. More information can be found at www.nestpensions.org.uk.
