Q&A: National Employment Savings Trust
- 27 October 2010
- From the section Business
The government has decided that all employers, no matter how small, will have to enrol their staff in a new national pension scheme, unless they offer a comparable pension scheme to their staff already.
It is just one of the many big changes that will dramatically alter the country's pension landscape in the next few years.
The new pension scheme in question is called Nest - the National Employment Savings Trust.
Is this a brand new idea?
No. The idea was first suggested by Lord Turner's Pension Commission in 2005, but the plan has been in development since then.
What will it offer?
Nest will be a glorified defined-contribution pension scheme.
The cash contributions from staff and employers will be invested in investment funds.
When members retire, they will have to use the money to buy an additional pension.
Who will be in it?
The government is targeting this scheme at the nine million or so employees of private sector firms, mainly low or middle-income earners, who are not in any sort of company pension scheme.
Nest estimates there are 750,000 such employers.
The government expects that between four and eight million people will either join Nest or be recruited by automatic enrolment to their employer's existing pension scheme, with compulsory employer contributions.
Will it be compulsory?
All employers will have to enrol their employees in Nest if they do not already provide a pension scheme requiring similar levels of contributions.
However, it is not true to say it will be compulsory for all employees to be recruited.
Staff eligible for automatic enrolment will have to work in the UK, be aged at least 22 and be below the state pension age, and be paid at least £7,475 a year - the threshold for paying income tax from April 2011.
Enrolled staff can chose to opt out if they wish.
Also, staff employed for less than three months will not need to be enrolled by their employer automatically, although they can join of their own accord and attract employer contributions too.
When will it start?
The scheme starts up next year, but automatic enrolment starts in October 2012 and will be phased in, so it will not get under way fully until 2016, by when all firms will be required to have enrolled their staff.
Even then, full contributions will not be required until October 2017.
How much will it cost?
The aim is that by 2017 staff will pay in 4%, employers 3% and tax relief will contribute another 1% - making 8% of earnings in all.
Employers and employees will be able to pay in more if they wish.
The contributions will be calculated on a worker's earnings above the current national insurance earnings threshold of £5,715.
And someone who earns between that level and the income tax threshold of £7,475 will be able to opt in to Nest, and attract employer contributions too.
How will the money be invested?
There will be several underlying funds in which the contributions will be invested.
Currently, there is a maximum £3,600 limit in total annual contributions into Nest.
The government's review recommends this cap on contributions be abolished in 2017.
How will it relate to the current state pension and company and private pension schemes?
Nest will provide additional pension to the current state pension, the second state pension, and any other company or private pension arrangements of which people may be members.