National Employers Savings Trust (NEST)

The last administration proposed a wide-ranging review of pension saving in the UK and introduced the concept of the National Employers Savings Trust or NEST for short. Much work was done on this subject prior to the election in May 2010 and some felt that NEST would not survive the new Coalition Government. After some consideration NEST seems now to be proceeding at pace with a trial pilot (through Volunteer employers) starting next year (2011) and full implementation with the full scheme being launched in 2012 and most employers being tied into the arrangement in 2014.

It is clear that the public in the UK is not saving enough for its retirement income because many individuals will fall short of their target income at retirement. With the pressures on the State Pension increasing, many people will know of the proposed levelling off of State Pension benefits for all at a level of £140.00 per week from 2015. We are also aware that the State Pension age is increasing from 65 to higher ages, such as 66 for both men and women from 2020 with further changes to follow.

To help with this situation, NEST is being introduced. It is proposed from the start date the contribution level to the scheme of a minimum of 2.0% pa, with 1.0% pa being paid by employers and 1.0% pa by employees (0.8% pa net contribution and tax relief of 0.2% ).

I have listed a link below for the phased start dates based on the number of staff that you have within your organisation.

http://www.thepensionsregulator.gov.uk/pensions-reform/duty-dates-timeline.aspx

There will then be a phasing of increased contributions with a minimum total level of 5.0% pa being introduced between October 2016 and October 2017 and then from 2017 a contribution level of 8.0% pa, with 3.0% pa coming from the employer, 4.0% pa coming from the employee and the balance as tax relief (subject to any changes). It should be noted that the percentage is of all income including basic salary, commission, bonus and overtime. Therefore if an employer is looking at the cost to their company of NEST then it should be looking at the total salary cost including all of these items rather than base salary.

Employee Opting in and out

All employers will be required to automatically enrol (on their Automatic Enrolment Date/ AED) their eligible workers into a qualifying pension scheme and to make the relevant contributions to the qualifying scheme selected. NEST is one option available to all employers. Employees will have the facility to opt-out of their employer's qualifying scheme after being automatically enrolled within a prescribed time period if they do not want to join in. They have one month from the date that they have been given prescribed information to opt out and they may do this by contacting the scheme. They will then be put back in the position they would have been in if they had not joined the scheme. This may involve a refund of any contributions taken following automatic enrolment into the scheme. They can opt out after the a enrolment period, but this may mean they are given a preserved pension. Some trust based schemes may provide a refund less tax under short service refund rules applicable to some occupational pension schemes within two years of joining. If an employee opts out the employer will not have to make their required contribution but the employer cannot induce the employee into doing so.

They can opt back in later at the employer/qualifying scheme’s discretion and will be automatically re-enrolled every three years. The employer will then have to contribute again in accordance with the phasing above.

Administration & Existing Schemes

An employer can decide to run a scheme within its own arrangements or use the NEST arrangements put in place by the Government to collect contributions and to administer them accordingly. Some employers already have pensions schemes in place and an employer will need to designate these schemes with The Pension Regulator to join them into the NEST programme. If an employer wants to do this they will need to look at the cost to them and the scheme in doing this.

Dates and Contribution Phasing

The employer will be notified by The Pensions Regulator 12 months prior to the date they have to implement their phase of the NEST funding. The contribution level will be phased from the outset with larger employers starting in October 2012. The initial contributions will be as follows (Contributions to be made on a band of earnings between £5,715 pa and £33,540 pa (the lower limit to be linked to the National Insurance LEL and the higher limit in 06/07 terms and up-rated in line with National Average Earnings)

• Employer: 1.0% pa of earnings
• Employee: 0.8% pa of earnings
• Tax relief: 0.2% pa of earnings

Second Phase - October 2016 to October 2017
From October 2016 the second phase starts and will see an increase in funding/contributions to 5% of earnings (salary/bonus/overtime, etc within band earnings) divided as follows:

• Employer: 2.0% pa of earnings
• Employee; 2.4% pa of earnings
• Tax relief: 0.6% pa of earnings

Third Phase -October 2017 onwards
From October 2016 the second phase starts and will see an increase in funding/contributions to 8% of earnings (salary/bonus/overtime, etc within band earnings) divided as follows:

• Employer: 3.0% pa of earnings
• Employee: 4.0% pa of earnings
• Tax relief: 1.0% pa of earnings

You can see that there are some significant consequences to this legislation and therefore many employers need to start planning now to ensure that they are ready for the changes in their cost projections, and also the requirement to ensure that they are ready to meet their responsibilities.

It should be noted that the level of tax relief, the way contributions are calculated based on income levels or ‘Band Earnings’ and some other issues may vary and are open to consolation at this time.

Churchouse Financial Planning Limited is well placed to help employers with this and we would be pleased to speak with directors of your company to ensure that you meet the requirements needed. This should not be seen or used as individual advice and you should seek independent financial advice for your own circumstances.

Contact Keith Churchouse on 01483 578800 or via churchouse.com

Churchouse Financial Planning Limited is Authorised and Regulated by the Financial Services Authority.