The Simple Guide To NEST Pensions
The Pensions Act of 2008 established a number of initiatives designed to ensure that as many workers as possible were saving for retirement. Among those initiatives were auto-enrolment and the NEST pension programme. Both initiatives are intrinsically tied together through the legislation.
The NEST acronym stands for ‘National Employment Savings Trust’. NEST is a government-backed occupational pension offered and administered by the NEST Corporation, a purpose-driven government corporation established as part of the 2008 legislation. Because NEST pensions are government-backed, they meet the qualifications for auto-enrolment among those companies using them.
The rules governing the NEST programme cover both the employer and employee. Workers whose employers choose to use a NEST pension will find that investing, for practical purposes, is very similar to that which would be experienced with a more traditional private pension plan.
NEST Pensions for Employers
Lawmakers understood when creating the Pensions Act that they were about to force auto-enrolment on companies that may legitimately be unable to afford to provide pension schemes to workers. In order to overcome that problem, they created the NEST programme. NEST pensions make it possible for employers to fulfil auto-enrolment obligations through a package that is easy to set up and very cost-effective compared to private pension plans.
Here are the key points employers need to know:
- Staging Date – Auto-enrolment includes different staging dates depending on the size and turnover of individual businesses. Companies need to know when their staging dates are in order to know when they must begin offering a workplace pension. The earlier they start planning, the better.
- Auto-Enrolment – Auto-enrolment rules apply to workers depending on their age and annual earnings. Employers can find complete information on who is eligible for auto-enrolment by visiting the website of the Pensions Regulator. Some workers not eligible for auto-enrolment still have the legal right to voluntarily participate.
- NEST Eligibility – Almost every UK employer is eligible to use the NEST programme to provide a workplace pension. The government has set up a dedicated website to help facilitate NEST establishment. The site provides a complete step-by-step guide along with answers to the most commonly asked questions.
- Future of NEST – Auto-enrolment will be complete by the end of 2018. However, that does not mean the NEST programme will be closed. Employers will be able to continue offering established NEST pensions while workers will continue contributing to their accounts.
The government has made a point of urging companies to look into NEST pensions well in advance of their staging dates. Even though the pensions can be set up rather quickly, there is paperwork that needs to be submitted in a timely fashion. Furthermore, there are some options that need to be worked through prior to setting up a new pension plan.
NEST Pensions for Workers
The average worker will not notice significant differences between NEST pensions and privately run occupational pensions. Practically speaking, saving and investing in both kinds of schemes are almost identical. Here are the key points that workers need to know:
- Contribution Limits – The one downside to NEST pensions is that these are subject to lower annual contribution limits of just £4,700 per year. The limit applies to the combined contributions of worker, employers, and tax relief. Additionally, employer contributions must be a minimum of 3% of earnings beginning in 2018.
- Investment Choices – Every NEST participant is automatically enrolled in the programme's default investment funds. Members do have the option to invest in other funds, but those options may be limited as compared to privately offered pensions. Current offerings include five separate funds from which members can choose.
- Annual Charges – Administrative charges for NEST pensions are limited to a 1.8% charge on contributions and a 0.3% annual administrative charge. These charges are comparatively less than those offered by private pension providers.
- Early Access – NEST pensions are eligible for some of the early access options afforded to private occupational pensions. A certified financial advisor can explain those options to anyone looking to access pension monies after age 55.
- Pension Transfers – NEST funds must remain in their accounts until retirement age. This means a member cannot transfer out of a NEST plan and into something new.
It should be stated that NEST pensions are defined contribution schemes. This means that eventual retirement income will be based solely on how well a member's investments perform. For this reason, it is essential that members track the performance of each of the programme's five funds for as long as they continue to contribute. Shifting money from lesser performing funds to better funds increases earning power.
NEST Pensions for the Self-Employed
The majority of NEST providers will be employers looking for a low-cost pension alternative to offer employees. Nevertheless, one of the nice benefits of the programme is that it is also open to the self-employed. Prior to the establishment of NEST, the self-employed were limited to stakeholder and self-invested personal pensions. The NEST programme offers them yet another option for providing for retirement.
Here are the key points the self-employed need to know:
- NEST Eligibility – For purposes of distinction, the government defines two types of self-employed individuals eligible for the programme: the self-employed and sole directors of companies that do not employ anyone but the company owner. Rules are applied to both groups equally.
- Opting Out – Unlike workers enrolled in NEST through their employers, self-employed members cannot opt out and take their cash with them. All funds contributed to a NEST pension remain in that pension until retirement.
- Contributions – The self-employed must set up their own contributions in whatever way they see fit. Contributions can be made via bank transfer, debit card, or direct debit online. Contributions can be made as often as the member chooses with an annual limit of £4,700.
- Change in Status – Self-employed individuals who go to work for employers can continue contributing to a NEST. If the employer also uses the NEST programme, they can contribute to the existing pension as well. Annual contribution limits apply in either case.
- Hiring Employees – The self-employed individual who chooses to hire additional employees may then be subject to auto-enrolment rules. In such a situation, it is recommended that the individual sign up with NEST again as an employer. Contributions can continue being made to the existing pension plan.
The NEST programme was designed to be an affordable and easy way to establish a pension plan making auto-enrolment possible for companies that would otherwise be unable to comply. Thus far, it appears as though the programme is accomplishing just what the government intended when it first created it.
If you are an employer approaching your auto-enrolment staging date, it is important that you begin looking into all of your options – including NEST pensions. Waiting until just a few weeks before your staging date will only create unnecessary problems for you and your executive management.
If you are an employee who has been offered membership in a NEST scheme, rest assured that it would provide you with sufficient means to save for retirement for as long as you continue contributing to it. Please do the necessary research to be able to track NEST funds throughout your years of contribution.
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