Workplace pensions law is changing – NEST The National Employment Savings Trust Part 1
Workplace Pension Schemes have been around for many years but they are attracting more attention now because of the gradual introduction of NEST (The National Employment Savings Trust) over the next few years. The vast majority of schemes fall into two categories, ‘defined contribution’ where the benefits at retirement depend on how much is invested, how much it grows, and annuity rates applying at retirement age and ‘defined benefit’ where the benefits, typically, are more related to years of service and levels of earnings. A key difference is that the former is affected by investment performance but the latter isn’t.
Membership of these schemes has, on the whole, always been voluntary. This situation is going to change. Auto-enrolment is here! For some years now successive
Governments have realised that people are living longer but saving less for retirement so action has to be taken. From what we know at present the State will not be able to pay an adequate income to future pensioners so NEST is an attempt to help remedy the situation. Whereas, until now, membership of schemes has been voluntary, employers will have to automatically enrol employees into NEST and it will be up to individuals to take action to opt out if they wish. If anyone opts out they will be auto-enrolled again three years later. No doubt the government will rely on employee inertia to help the scheme be a success. Apparently, in other countries with similar schemes, the opt-out rate is quite low.
If you are an employee you will be enrolled if you are not already in a workplace scheme, you are aged 22 or over, under State Pension age, earn more than £8,105 per annum and work in the UK. The minimum earnings level could change each April. They will be introduced in phases starting from 2012, and will eventually oblige all employers to offer the scheme to employees by 2017. Very large employers will be the first to be involved, with the smallest being the last.
Any employee in a NEST scheme will initially have to pay a minimum of 1%. Employers will match it, with the government contributing another 1% through tax relief, bringing the total to 3%. These low level contributions will rise over time, so that eventually the total will equal 8%. This will include a contribution of 3% from employers and 4% from employees with a further 1% in tax relief. Both will have the option to contribute more if they wish.
In the second part of this blog we will look at some of the issues that employers and employees will face under the new regime.