Workplace pensions: NEST restrictions will be lifted
Restrictions on NEST, the government-backed pension provider, willl be lifted in 2017. This is welcome news.
At Lovemoney, we’ve been long-standing fans of the Government’s auto-enrolment scheme.
The basic idea of the scheme is that most working adults should be forced to contribute to a pension unless the employee makes the effort to opt-out. Read more in Workplace pensions: your salary will fall by £300 per year from October.
One potential problem was that the traditional pension companies might be unwilling to manage pension schemes for small employers with staff at low salaries. So the Government set up the NEST pension scheme, which is obliged to provide a scheme to all employers who need one.
Restrictions
However, NEST has been hemmed in by two restrictions:
- If you switch job, you can’t move your NEST pension pot to a different pension provider. You also can’t switch pension pots from previous jobs to NEST.
- No more than £4,500 can be paid into an individual’s NEST pension pot each year.
These restrictions were introduced so that the existing pension companies wouldn’t be damaged by competition from a Government-backed provider.
Good news
However, Steve Webb, the pensions minister, has announced that both of these restrictions will be lifted in four years’ time.
Webb argues that 2017 is a sensible year to lift those restrictions because that’s when the minimum contributions for auto-enrolment will be increased.
Currently, only employers with larger workforces are affected by auto-enrolment. The minimum contribution is 2% a year - 1% from the employer and 1% from the employee. So you’d have to earn at least £90,000 a year to go over NEST’s £4,500 limit.
But in 2017, all employers will be obliged to pay money in and the minimum contribution will be 5% (of which at least 2% must come from the employer). The minimum contribution will rise again to 8% in 2018.
So if the Government didn’t lift the £4,500 contribution limit on NEST, there was a real risk that firms would have to move some employees out of NEST and into another scheme. This was especially likely if a particular employee had been promoted and received a pay rise.
But not perfect
Although I welcome Webb’s decision to lift the restrictions, I wish these changes were implemented this year rather than 2017.
I don’t see any sign that NEST is swamping the market and driving competitors into the ground. For starters, we’ve seen the launch of new low-cost pension providers such as NOW: Pensions and The People’s Pension.
What’s more, some of the incumbent pension companies have also been winning auto-enrolment mandates. For example, Legal and General won an auto-enrolment contract from the catering firm Sodexho last year when the expectation had been that Sodexho would go with NEST. I’m sure all the ‘big boys’ could have coped if the restrictions had been lifted this year.
And the freedom to transfer pension pots to and from NEST will encourage people to stay engaged with their pensions. So it would be great if this freedom could be introduced this year.
Still, at least the restrictions are set to be lifted eventually. That can only be a positive thing as we try to build a new culture of saving for a pension in the UK.
More from Lovemoney:
Workplace pensions: your salary will fall by £300 per year from October
Auto enrolment: should saving for a pension be compulsory?
How to choose when you will retire
Workplace pensions: how NEST will invest your compulsory pension
Lifestyling: the ‘low risk’ pension tactic that could decimate your pot
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Comments
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@ Iamcoldsteve - you can already retain control of your pension and avoid purchasing an annuity. Lovemoney have covered several articles on this! Perhaps the best thing to come out of auto enrolment is that by deducting from workers salaries everyone will become more interested in where this money is going and therefore more interested in pensions! That can only be a good thing.
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cold steve, you've got some nice ideas, but for many of us it doesn't matter. Anyone under about 35 doesn't really need to bother with a pension, since by the time we reach 65 there won't be any such thing as retirement, We can only afford for people to retire if there's enough people working.to support them, and at current rates there won't be And for all those of us on nothing - they can make my employer contribute half my salary, it's still zero. One has to have spare money to save for retirement; right now it's all a whole lot of us can do to keep a roof over our head.
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What I really want to know isn't about the rather pointless 2% contribution (yes, better than nothing, and yes a minimum), but rather about what the rules on what you can do with your pension fund when you retire. Currently you have to buy an annuity (with up to 25% tax free lump sum) at pathetically low rates. When you die, the capital then goes to the provider - assuming they invested it, there will be something left (actually they very well invest it at a higher rate than the annuity you bought). All this is perverse and ridiculous. Why not be in control of your own 'pot', and take a 'salary' from it (whilst investing the capital) - paying tax if appropriate. At least then you keep in control of the fund you have striven to maximise, and YOU get the benefits. Upon your death it is very likely that there will be some of the fund left for your estate, instead of the greedy annuity provider pocketing the cash for almost no involvement. I believe it is high time to radically rethink our private pension 'at the point of retirement' rules.
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11 July 2013