National Employment Savings Trust - NEST
NEST is a new pension scheme set up by Government that can be used by any employer to meet their workplace duties regarding making pension contributions for their workers.
Automatic enrolment is expected to bring around 11 million people into workplace pensions over the next few years. This involves employers choosing a pension scheme, enrolling their workers into that scheme and arranging for contributions to be paid into that scheme. There are numerous options for employers, including amending existing pension scheme rules. However one option is to use the NEST scheme.
NEST is a non-departmental government body. Its funded by a a loan from the Department for Work and Pensions (DWP), which will pay for the scheme to be set up and running costs of the scheme in earlier years, while the membership is still growing. It is a workplace pension scheme that can be used by any employer to meet their workplace duties. It was established by statute as part of the workplace pension reforms and is the only scheme in the UK with an obligation to take any employer, regardless of the size of the business.
NEST is run in the interests of its members by a Trustee – NEST Corporation. It doesn’t have shareholders and doesn’t distribute a profit. It's a non-departmental public body operating at arm's length from government but is accountable to Parliament through the DWP. It has a combination charge of a 0.3% annual management charge and 1.8% on contributions, e.g. for each £100 paid in there is a charge of £1.80 and £98.20 goes into the pension pot, if the value of the pot is say £10,000 then the annual management charge will be £30.
It has been designed to be easy to manage online for both employers and members.
Auto enrolment started from October 2012. Large employers were the first group to have to auto-enroll employees. For example if an employee worked for a large employer, and earned more than £8,105 a year, the employer is legally obliged to enroll themin a pension scheme. They can thendecide whether to remain signed up to it or opt out. Employers will need to automatically enroll and pay minimum contributions for any workers aged at least 22 but under 65 or State Pension age, who earn more than £8,105 in a year. Also for workers who are at least 16 but under 75 who earn from £5,564 to £8,105 in a year and who ask to be enrolled the employer must enroll and pay minimum contributions.
Employers also need to enroll any workers aged at least 16 but under 75 who earn less than £5,564 who ask to be enrolled. However the employer does not need to pay contributions for them.
The above figures apply for the 2012/13 tax year and they will be reviewed every year by the government.
Those working for smaller employers will be auto-enrolled in a pension scheme over the next few years.
Using NEST employers can enroll workers three different ways:
(a) Enroll one worker at a time
(b) Upload a file using a NEST template, or
(c) Transfer a file directly through secure file transfer.
To enroll workers into NEST employers need to provide the workers name, address, date of birth, national insurance number, whether they are eligible for tax relief, date contributions are to start and email address if known.
The legal minimum is 2% of a worker’s qualifying earnings. Of this the employer needs to pay at least 1%. By 2018 the minimum contribution level will have risen gradually to 8% of which the employer needs to pay at least 3%. The employer and employee can contribute more if they choose to.
Tax relief on the employees’ contributions at the basic rate is also added to the pension pot. NEST allows up to £4,400 in 2012/13 to be paid into a worker’s retirement pot. NEST calls this their contribution limit. This figure will be adjusted annually in line with average earnings.
Employers will send contributions by creating a contribution schedule with the name, and national insurance number of each member enrolled. If the national insurance number is not known an alternative unique identifier can be used. Also included should be the workers earnings in the pay period and the amount of contributions both from the employer and the worker. The payment needs to be in NEST’s account by the due date, which the employer will choose when they set up the group scheme.
If a worker opts out of the NEST scheme the employer is informed by NEST so that the employer can stop future contributions.
If a worker opts out within one month of being enrolled any contributions will be refunded. If a NEST member stops contributing to their pension pot after the opt out period any contributions already made will stay in their pension pot.
NEST allows more than one employer to contribute to a worker’s retirement pot at the same time. This means the employer can contribute for workers who have other jobs, such as part-time workers.
The employer can pay contributions weekly, fortnightly, monthly or every four weeks. Payments can be made using direct debit, debit card or direct credit.
Worker contributions must be paid to NEST no later than the 22nd day of the month following the month in which they were taken out of the worker’s pay. For example, if a worker’s contribution is taken from their earnings on 25 July, and their contributions are paid monthly, then for the calendar month of July their contribution would need to be paid to NEST no later than 22 August. However the employer could choose any time between the beginning of July and 22 August.
What happens if employee changes jobs
If the employee changes employment and the new employer doesn’t use NEST the employee can choose to carry on paying into their NEST pension pot. The person can continue to contribute to the NEST pension scheme if they become self employed.
Keeping track of the pension scheme
The employee can log into their account online using passwords. You will be given a NEST ID and you can create your own password. If you don’t activate your online account, you’ll receive a paper statement after the first year, but you’ll have to contact NEST after that if you want to keep getting paper statements.
Investments held by NEST
A member’s contributions along with any contributions from their employer and tax relief will go into their NEST retirement pot. This will be automatically invested in a NEST Retirement Fund for the year they are expected to take their money out of NEST. This is called a NEST Retirement Date Fund. So the member informs NEST when they will want to take their money out and NEST invest in the appropriate fund. They can switch to NEST’s alternative funds if they prefer.
NEST have a three-stage investment approach as follows
1. Foundation phase
This first stage aims to avoid falls in value. During this phase NEST expect to grow a member’s pot by at least the cost of living after all charges have been taken into account.
2. Growth phase
This is the longest phase and can last up to 30 years. During this period the objective is to grow the member’s retirement pot by at least 3% more than inflation after all charges have been taken into account.
3. Consolidation phase
The final stage aims to get the retirement pot ready for the member to take their money out of NEST. The retirement pot is gradually moved into investments that suit the mix of cash and retirement income that they’re likely to take. During this period NEST expect the pot to grow more than the cost of living while protecting it from big falls in value close to retirement.
It’s easy and free for members to switch funds through their NEST online account or by telephone.
NEST Corporation looks after member’s money. They invest in a range of investment funds provided by independent fund managers.
How to draw your pension from NEST
The pension cannot start to be paid from the NEST pension pot until you reach your 55th birthday. NEST will set a date that they expect you to retire, usually your State Pension age. However, if you want to choose a different date you can let NEST know by phone or letter or by logging into your online account. You will need to start withdrawing your pension before your 75th birthday.
After reaching the age of 55, a NEST member can take some for their pension pot as cash and convert the rest into a retirement income. If the pot is worth up to £2,000 it can all be taken as a cash lump sum. One quarter of it will be tax free, but the rest will be taxed as income. The worker may still be able to do this if their pot is worth more than £2,000 as long as all their pension pots including NEST add up to less than £18,000 and all are taken within 12 months.
Even if not able to take all of the pot as cash, usually up to one quarter of the pot can be taken as a tax-free cash lump sum and the remainder used to convert into retirement income.
The process of converting a NEST pension pot into a retirement income will involve using that pension pot (less any tax free lump sum) to buy an annuity. NEST does not provide these annuities, however they will provide information which will help the NEST member decide where to purchase this annuity from.
Advantages of NEST
Its online and easy to use withemployers able to carry out most processes through their online account available 24 hours a day 7 days a week. This includes enrolling members, setting contributions and making payments.
The cost of set-up is low; there are currently no charges for employers to set up and use NEST. Also Charges for members are low.
Employers can create delegate accounts to allow other people to look after NEST for them. This could be someone within their organization or an external service provider such as an adviser.
NEST can work alongside existing schemes. An employer can use NEST as their only scheme if they want. It’s also flexible enough to work alongside other schemes they may already use.
NEST has a step by step approach for employers to help with “getting started”, “what to do and when”, “employer duties”, getting set up” and “information needed to be given to workers”. All this information is available on-line and free of charge.
Employers have no ongoing administration or responsibility for the NEST retirement pots of workers who leave their employment. With NEST every member has one retirement pot that they keep and can contribute to whether they change employment, stop working or become self employed.
Workers can opt out on the website or by telephone.
Members deal directly with NEST when they want to change their contribution levels, switch funds or find out what’s happening with their account. This means they can make the decisions they need to without having to turn to their employer to make them happen.
When a member approaches the date that NEST expect them to take their money out of NEST, Nest support them by giving them guidance on their retirement options and helping them find a retirement income if that is appropriate.
Disadvantages of NEST
NEST sets a maximum contribution. For the tax year 2012/13 this maximum contribution has been set at £4,400. This is the amount that can be paid into a worker’s retirement pot, so may be unsuitable if the worker or employer wants to make larger contributions.
The range of investments which the pension pot can be invested in may be too limited for some workers.
NEST does not allow its members to put into effect income drawdown or flexible drawdown, although these options are usually more relevant for large pension pots.
The Pensions Regulator staging date timeline which explains when auto enrollment starts for different sized employers.
The NEST homepage gives further details.