The National Employment Savings Trust (NEST)

The National Employment Savings Trust (NEST)

MoneyVista's guide to the new national pension scheme.

Written by Jonquil Lowe on 02 June 2013


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A new national pension scheme

The Government estimates that around seven million people are not saving enough for retirement.

To tackle this it is bringing in automatic enrolment. This means that employers have to automatically enrol most of their existing and new employees into a work-based pension scheme and make contributions to it. Employees will be able to opt out if they want to.

Where an employer doesn't offer a suitable work-based pension it will be able to enrol employees into a new national pension scheme called the National Employment Savings Trust (NEST).  

This guide explains how NEST works.

The National Employment Savings Trust

NEST has been especially set up to provide a straightforward, value-for-money way to save for retirement. The main features of NEST are:

  • It is a money purchase scheme.
  • On top of the compulsory contributions from you and your employer (see above), you can pay in extra contributions (minimum £10) at any time.
  • Other people - for example, your partner - can pay into your NEST account for you.
  • There is a limit on the total from all sources that can be paid in each year. This is currently £4,500.
  • The contributions are normally invested in a 'Retirement Date Fund'. This is an investment fund that is designed to carry on building up until your chosen retirement date at which point it is assumed you will want to start drawing a pension. When you are a long way from retirement, the fund invests in assets such as equities that offer the chance of a relatively high return but whose value can fall as well as rise. As retirement approaches, your money is switched to assets that are more secure but tend to produce lower returns. There is a limited choice of other types of investment funds available if you prefer.
  • If you change the date at which you want to retire, your savings are switched to a different Retirement Date Fund corresponding to the new age you have selected.
  • You directly pay two types of charges. For the foreseeable future, there is a deduction of 1.8% from each contribution. For example, if the amount paid in including tax relief was £100, £1.80 would be deducted, leaving £98.20 to be invested. There is an annual management charge (AMC) of 0.3% of the value of your fund every year. For example, if your fund was worth £1,000, £3 would be deducted in charges for the year.
  • As with any investment fund, there will also be other charges that are met by the fund itself, such as fees for looking after the assets safely and dealing costs when they are bought and sold.
  • You carry on being a member of NEST if you change jobs. However, if your new employer offers a different pension scheme, you might want to join that instead. Your NEST account would still carry on growing and you can still pay into it.
  • If you are self-employed, you can choose to join NEST (even though automatic enrolment does not apply to you).
  • You can draw your money out at any time between ages 55 and 75. You can take a quarter of your money as a tax-free cash sum and the rest must be drawn as pension (to which the normal income tax rules apply).

To find out more about NEST, visit www.nestpensions.org.uk.

How much pension might you get?

With money purchase schemes, like NEST or a personal pension, it is impossible to know for sure how much pension your savings might provide because this will depend on stockmarket performance, inflation and the rate at which you can convert your pension pot into pension when you reach retirement.

The table below gives examples of how tax relief and the contribution from your employer can help your retirement savings and the possible impact of charges, based on assumptions about investment growth and inflation.

For comparison, the first line of the table shows how much your savings might be worth in an imaginary world where there is no tax relief, tax or charges.

The second line in the table shows how tax relief on your contributions increases the size of your pension pot by a quarter.

The third line shows how the employer pension contribution boosts your pension pot by 60%.

So far, we have not taken into account any charges. The next line shows the possible impact on your pension fund if you were saving through NEST. The 1.8% contribution charge and 0.5% AMC reduce your fund by nearly £670 over 10 years and by around £6,600 over 30 years.

For comparison, the last line in the table shows the size of your pension fund if you were in a personal pension plan with no upfront charge but an AMC of 1.5% a year. You can see that the outcome, particularly over longer terms, is considerably worse than saving through NEST would be.

How your pension fund might build up [1]

 

Possible size of your pension fund in today's money[2]

Years until you reach retirement

10

15

20

25

30

Notional fund with no tax relief, tax or charges

£9,208

£14,915

£21,512

£29,138

£37,954

Saving with tax relief but no charges

£11,510

£18,644

£26,890

£36,423

£47,443

Saving with tax relief and employer pension contribution but no charges

£18,416

£29,830

£43,025

£58,277

£75,908

Saving with tax relief, employer pension contribution and NEST charges

£17,802

£28,597

£40,891

£54,892

£70,837

Saving with tax relief, employer pension contribution and typical personal pension plan charges

£17,042

£26,510

£36,673

£47,579

£59,285

[1] Figures for a person earning £20,000 a year. Assumes earnings grow in line with inflation which is assumed to be 2%, 4% employee contribution, tax relief on this at 20%, 3% employer pension contribution and investment growth of 5% a year. Contributions are assumed to be made monthly.

[2] Assuming inflation between now and the end of the term equals 2% a year, the table shows the value of the fund in terms of today's buying power. For example, if you received £103 next year but prices were 3% higher than today, the £103 would buy only the same as £100 today and £100 would be the figure shown in the table for a term of 1 year.

When does automatic enrolment start?

When automatic enrolment will start to affect you depends on the size of the employer you work for.

Very large employers with 120,000 employees or more joined the system in October 2012. Month-by-month, more employers will join in reducing order of size. However, the Government has put back the dates for smaller employers, because of the difficult economic conditions they are facing. But by February 2018 all employees of existing and new employers should be signed up.

To find out when your employer is due to start automatic enrolment, ask your human resources department or check the phased implementation dates.

 

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