What is the National Employment Savings Trust (NEST)?

Written by Karen Bryan

The National Employment Savings Trust (NEST) is a workplace pension scheme which will be starting in 2012 and should be fully implemented by 2017.  NEST is a money purchase pension scheme, which means that there’s no guarantee of the pension you’ll receive, as that depends on the value of the fund in which your pension pot is invested.  Employees who earn more than the personal income tax threshold (currently £7475) will be automatically enrolled in the scheme, if their employer does not already offer a scheme which is at least comparable. However, employees can opt out of NEST.

National Employment Savings Trust

by Alan Cleaver

By 2017 a total of 8% of enrolled employees annual income (capped at an annual total contribution of £4.200) will be paid into the employees pension fund. This will comprise of contributions of 4% by the employee, 3% by the employer and 1% from a tax relief.

Below is my personal evaluation and opinion of the National Employment Savings Trust.

Advantages of NEST to Employees

I like the fact that after full implementation in 2017, employers will be required to pay 3% of your pay into the scheme and you will receive tax relief equivalent to 1% of your pay.  This effectively means that for every £100 that you pay in, £200 (minus £3.60 contribution charge) will be paid the your NEST pension pot, as your employer will pay in £75 and tax relief will be £25.

Auto enrolment of employees earning over the personal tax threshold means that employees won’t have to make the effort to set up some sort of pension scheme for themselves, it will be ready for them to start saving, unless they choose to opt out.

NEST will be portable between different employers. If you start a new job and your new employer offers a NEST workplace pension scheme, you and your new employer just keep paying into your individual pension pot.

Disadvantages of NEST to Employees

There will be some charges. A contribution charge of 1.8% i.e. for every £100 contributed to your pension pot, there will be a charge of £1.80. In addition, there is an annual management fee of 0.3% of the total value of your pension pot i.e. if your pension pot is valued at £10,000, there will be a fee of £30.

Will low paid workers be able to afford to pay 4% of their pay into a NEST, if they are just managing to make ends meet?

Having a money purchase pension makes it hard to plan when to retire if you don’t know what annual pension you can buy.

Your NEST will be invested in stock market related funds, so you don’t know what it will be worth at the time you want to retire. There are no guarantees about the value of your pension you will receive, making it difficult to decide when to retire.

Would I Join NEST?

This is a hypothetical question, as I’m currently self employed but, here’s my opinion if I were an employee.

If my employer offered a defined benefit pension scheme I’d prefer to join it, as I’d know what pension payment to expect, based on percentage of my salary and on the number of years I’d paid into the scheme. Whereas with a NEST, the size of my pension would depend on the value of my fund when I cashed it in.

If a defined benefit pension was not available to me, I’d join NEST, as my total contribution would be double what I personally paid in.  I’d view this as top up to my state pension and would aim to cash it in when the fund value was high, rather than on a specific date.  I’d look at it as a long term investment and be aware that my NEST pension pot could increase or decrease in value.

I wish that NEST had been around during the 20+ years I was an employee, as I would have built up some additional pension provision through my employer having to make contributions to my National Employment Savings Trust.

Update 29 November 2011

The UK Government has announced a one year delay to auto-enrolment for firms employing fewer than 50 workers.

Warning

This article is based on my personal research and understanding of the product.  Make sure that you very carefully read all the terms and conditions before you sign up to a financial product. You may wish to seek professional advice on which pensions options are be best for you.