What is NEST?
From October 2012 the UK Government will introduce a new pension scheme to the UK as part of a bigger overall pensions reform strategy. Previously known as “personal accounts", pensions minister Angela Eagle announced the new brand – The National Employment Savings Trust or NEST on 7 January 2010.
The full proposals include reforming the UK State Pension to make it simpler and more generous, as well as formally extending people’s working lives.
Who will NEST affect?
The Government estimates that about seven million people are currently not saving enough for retirement and a major part of the reform is the Government’s ideas to make it easier for these people to make provision for retirement.
The proposals will have wide ranging effects across every field of UK business as the onus will be put on employers to help encourage more people to save:
From October 2012, UK employers will be required to automatically enroll employees into a 'qualifying workplace pension scheme'. Employees can be auto enrolled into their existing company pension scheme if it meets certain criteria. If it does not meet the criteria or if there is no company pension scheme then employees will be enrolled into NEST, a simple low-cost pension scheme being introduced by the Government.
Between October 2012 and 2017, depending on the size of company, all UK employers will be required to contribute a minimum of 3% of each employee's eligible earnings into a pension, assuming the employee does not 'opt out'.
This is intended to incentivise them to start saving towards their retirement. Employees will need to pay a personal contribution of 4% with a further 1% tax relief being added to make the minimum contribution 8%.
This leaves UK employers with a pivotal role and the Government is proposing key measures designed to minimise the burden on them:
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Compulsory employer and employee contributions will be phased in.
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Simple, straightforward, qualifying criteria for existing Company Pension Schemes, meaning many existing schemes will meet them, perhaps with minor changes.
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A ‘light-touch’ but effective compliance regime for new employer duties such as automatic enrolment.
How will NEST work?
From October 2012, larger employers will be required to automatically enrol employees into a qualifying workplace pension and make a minimum contribution. By September 2016, all employers - large and small - will have to auto-enrol eligible staff into a pension scheme (though all with at least 50 staff must comply by July 2014).
NEST will be one of these qualifying schemes available for employers to choose, particularly those without an existing scheme.
Eligible Employees
All employees will be auto-enrolled unless:
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they are already over the State Pension Age
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they are under 22
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they earn less than £7,475 a year*
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they are already in a a qualifying workplace pension scheme
Lower earners will be able to join, but have to opt in.
*The lower earning level for auto-enrollment has yet to be confirmed but we expect it to be the income tax threshold (£7,475 in 2011/2012).
What will the contributions be?
Until 2016, workers will put in a minimum of 1% of their salary and their employer a minimum of 1%. The Government's will 'contribute' in the form of tax relief.
Then in October 2016, contributions will rise to 5%, including at least 2% from the employer. Finally, the level will settle at 8%, with at least 3% from the employer and 5% from the employee in October 2017.
Contributions are paid on a workers qualifying earnings.
Earnings between £5,715 and £38,185* (in 2010 terms) over time these limits will be adjusted with inflation. Total earnings include salary, overtime, commission, statutory sick pay and statutory maternity/paternity pay.
*The upper band is likely to be aligned with the upper earnings threshold for National Insurance contributions in 2017.
Will there be a yearly limit?
Annual contributions will be capped at £3,600. The £3,600 limit will be based on 2005 earnings levels, and will be uprated in line with earnings in general.
However, the Government could remove the £3,600 Nest contribution cap in 2017 in line with recommendations by the auto-enrolment independent review team.
What next?
If you have any questions about how this new legislation will affect you or your company please give Cade & Co Llp a call on 01604 832932. We can provide a free review of your existing arrangements and draw up an action plan to ensure your company gets the best value for money from your pension arrangements.