28 April 2010

Building a NEST?

Personal Accounts, or National Employment Savings Trusts as we must now learn to call them, are expected to start from October 2012 – less than two and a half years away.

Actually, the timetable is far more complicated than that. For smaller employers, the need to enrol employees aged between 22 and state pension age who earn more than £5,035 (in 2006/07 earnings terms) does not start until a year later and, even then, they do not need to make the full level of contribution (which will be 3% of “band” earnings) before October 2017. Initially, they will only need to contribute 1% of earnings. Larger firms, however, are caught earlier, but still, initially, only subject to 1% contributions.

The new name for Personal Accounts

The “band” of earnings on which contributions are based is between £5,035 and £33,540 in 2006/07 earnings terms.
Employees will have initially also to contribute 1% as soon as their employer starts, although this eventually rises to 4%, with the government ultimately adding a further 1% in tax relief. Employees have the right to opt-out, once enrolled, but employers have no choice.

Are NESTs really going to happen?
NESTs are not universally supported, because they are likely to disadvantage lower-paid workers – who are the target for these enforced retirement savings. This is because of the operation of the means-tested Pension Credit. This involves claimants in giving up Pension Credit the greater their retirement income from other sources such as savings and private pension plans. So the effect for some will be that, as their NEST income grows, they will receive less Pension Credit. This effectively renders the contributions they and their employers have put in less beneficial.

Of course, to some extent, reducing the burden on the state is part of the objective in introducing NESTs in the first place, but this “catch 22” situation, whereby those saving for retirement might be little better off, has resulted in there being a lack of political consensus.

Which way to go?

Another political row?
It is not that any politicians are against the concept of helping people to save more for their own retirement; rather that not everyone agrees what is the best way to achieve this goal. In the event of a Conservative administration, there is likely to be a review of the situation, which is why we recommend a “wait and see” strategy for the next few months.

As soon as we know what the position is, Wentworth Employee Benefits Ltd will be publishing a series of detailed briefings so that you can be confident about the details of the scheme. We will be offering a review of your existing arrangements to ensure that any company pension scheme in place is state-of-the-art – and also avoids the need for getting involved with NESTs, if you don’t want to.

The need for professional advice in pension planning is even more important than before. In fact, it is important always to seek independent financial advice before making any decision regarding your finances. If you would like to discuss whether your current arrangements are suitable, or require any other information about employee benefits, please contact us.

THE VALUE OF INVESTMENTS IS NOT GUARANTEED AND WILL FLUCTUATE; YOU MAY GET BACK LESS THAN YOU PUT IN. NOTHING CONTAINED IN THE ARTICLE SHOULD BE CONSIDERED AS GIVING INDIVIDUAL FINANCIAL ADVICE.