The start of NEST is just a year away. But will it really solve the UK's pension crisis?
The countdown is on. We are just a year away from arguably the biggest shake up in pension history – the start of auto-enrolment. But what does that mean? And what should we be doing in the meantime?
A change to pension saving
At the moment, the pension pot you finish your working life with can change significantly depending on your employer. It used to be the case that employers would offer a defined benefit scheme, meaning that you knew that when you retired, you’d be paid a percentage of your final salary each year - say 80%.
However, these schemes cost employers so much that they soon became unaffordable. So many switched to defined contribution schemes, where the employer will match your pension contributions up to a certain percentage of your salary - say 5%.
Great if your employer offers such a scheme, but many employers don’t even offer defined contribution schemes, leaving your retirement saving completely up to you.
That’s all about to change though.
Saving a NEST-egg
Thanks to a new initiative, all employers in the UK, large or small, will have to enrol all eligible staff onto a qualifying pension scheme. If they don’t want to open their own pension scheme, they can use the Government’s own National Employment Savings Trust (NEST).
What’s more, the employers will be required to make contributions into the pension pots of their employees – a minimum of 3%. So if you earn £1,500 gross a month, and pay 3% towards your pension (£45), then your employer will have to match that contribution. When you consider the Government will top up your contribution with a further 20% thanks to the tax benefits of pension saving, clearly you get a decent bang for your pension contribution buck!
A staggered NEST
While the auto-enrolment scheme will be in place from next October, many of us won’t see the benefit for a few years. That’s because there is a staggered introduction of employers to the scheme. So only the biggest employers – those with more 120,000 staff members or more – will have to start enrolling their workers in pension schemes in October 2012.
In November 2012, employers with more than 50,000 workers will have to get rolling and those with more than 30,000 employees will have to join in from January 2013. Firms with more than 10,000 employees will have to start contributing from March 2013.
All very well if you work for a large company. But if you work for a small company, you’ve got a much longer wait in prospect. Indeed, if your firm employs less than 50 people, the date at which your employer needs to start auto-enrolment can vary from August 2014 to September 2016, depending on the firm’s PAYE reference numbers.
The problems to address
There’s a number of potential issues with the auto-enrolment scheme that still need to be addressed.
For starters, a big motivating factor behind the whole idea is to change the way British people think about retirement. Sadly, too many of us don’t put aside anywhere near enough money for retirement, or just delay saving towards a pension.
The Government hopes that this will change will the start of auto-enrolment – indeed, the Department of Work and Pensions reckons that pension contributions could jump as much as £10bn a year. But given employees can opt out of the scheme, how realistic is that? How many employees will decide to put off their retirement saving until a later date?
And then there’s the question of employers that already offer a defined contribution scheme. If they currently offer to match contributions at a higher percentage – one of my old employers matched contributions up to 9% of the salary, for example – will they cut that contribution, to offset the added costs of this scheme?
Pausing payments
Clearly, for many of us it will be a few years before we see any benefit from the dawning of the NEST era, making it all the more important that we spend the intervening period ensuring that we are still making sufficient payments into our pension pots.
So it’s worrying that new research has suggested a third of us have ditched pension contributions altogether.
According to Prudential, 35% of pension scheme members have put their contributions on hold. A third of those have done so because they are out of work, while 27% say they can no longer afford the contributions. They have my sympathy – money is undoubtedly tight for many people, and I know that my own payments over the last few months have not always been as high as they should have.
But most worrying of all, 45% of those who have paused payments say they have no plans to start again. It’s one thing to pause payments during the tough times, it’s quite another to ditch retirement planning altogether! You can get a better return from your pension without necessarily handing over any extra cash. Read Boost your pension, without paying a penny more!
If money is so tight that you simply can’t guarantee you won’t need to access the money you are putting aside in contributions, then perhaps saving in an ISA is a short-term alternative worth considering. That said, there are a fair few downsides to this approach. Check out Stop using a pension to save for retirement! for more.
So what do you think? Will auto-enrolment and NEST do the trick and get us focusing on saving for our retirement? Or will employees opt out, preferring to put it off until a later date.