Are you ready for the new low-cost pension scheme?

The National Employment Savings Trust (NEST) is a low-cost employee pension scheme due to be set up on behalf of the government in response to the introduction of auto-enrolled pensions in 2012.

With employers set to start using NEST later this year, Moneywise gives you the lowdown on the scheme.

Why NEST now?

NEST is the government's occupational pension offering. Employers don't have to use it - they can use their own system if they prefer - but whatever pension scheme they put in place it will have to be on an opt-out rather than opt-in basis.

The thinking behind this is that we're not saving enough for our retirement, so we need to have a set-up where we automatically start contributing towards our pensions.

What is auto-enrolment?

From 2012 all employers will have to enrol their workers into a workplace pension scheme. Up until now employees have had the option of opting in to a pension scheme; the new system will mean instead that those who don't want to contribute will have to opt out.

The upshot is that all employers will have to offer pension provision (NEST estimates that up to 750,000 currently don't offer their employees anything at all).

When does it all kick off?

There's no specific date, but a small number of volunteer employers will start using NEST this spring to test how it works over the summer. It won't be rolled out properly, however, until the end of the year.

Initially, it will only be the larger companies that have to introduce auto-enrolment; smaller companies won't have to take it up until August 2014.

Do I need to do anything before then?

The duty to set up an auto-enrolled pension system will fall on your employer, not you. You don't have to do anything, although of course if you decide you'd prefer to pay into an alternative pension, when the time comes you'll need to opt out.

Does that mean everyone will automatically pay into a pension?

Almost everyone. There will be certain age and salary conditions: you'll have to be at least 22 years old, under state pension age and earn more than £7,475 (personal allowance). NEST is specifically targeting the middle tier of people earning around £35,000.

Why would I go with NEST above other pension options?

Because you won't have to do anything: if you know you should be saving in a pension but don't know what to do about it, you can rest assured that at least you're saving into something. Charges are also pretty low (see below).

Do all employers have to use NEST?

NEST is just one occupational scheme. It's likely to be used by employers who don't have the resources or time to set up their own auto-enrol scheme; however, there's nothing to stop them setting up their own pension offering, so long as it includes an auto-enrol element.

How much can I contribute?

The total minimum contribution is 8%, including a minimum of 3% from your employer, although it's hoped they will give more. Contribution levels for NEST will be phased in, with an initial 2% split between you and your employer. In money terms, you and your employer can put up to £4,200 a year into your pensions pot.

What will it cost me?

The annual management charge is a reasonable 0.3%, while there's a 1.8% charge on new contributions, which means the charge isn't on the whole of your funds. NEST says this averages out as an overall charge of 0.5%.

How will you top up your income during your later years? Share your thoughts and vote in our poll.

NEST pros

• Recent research by AEGON shows it could almost double the number of people saving for retirement from around 14 million in 2012 to over 25 million by 2055.
• NEST is low-cost, with an average annual charge of 0.5% compared with 1.5% for a stakeholder pension.
• Your NEST pension will be portable for the rest of your working life. Because it can be used by different employers there are less administration and transfer costs to worry about.

NEST cons

• 12 million employees will be enrolled but there are comparatively few qualified financial advisers able to give suitable advice.
• Unless NEST can deliver, people could simply opt out and still be no closer towards a secure retirement.
• While the number of savers will increase, that's not to say that their pension savings will go up.
• Employers that are already stretched by pension contributions may cut these further due to the number of new members in the scheme.


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Your Comments

I am a low earner. After deducting my mortgage payments which will cease when I retire, the amount I live on now is the same as the basic state pension. I work for a local authority and have opted out of the pension scheme as I cannot afford an income any less than I currently have. As I will be 54 by April 2012, can I opt out of both the Local Authority pension scheme and NEST as well? I cannot afford to drop my income now in favour of earning more than I do now when I retire.

As the Australians have discovered, compulsory pension schemes just mean slothful offhand service, disguised and hidden charges and cheap uninspired investment. The government doesn't appear to have addressed any of these problems, but merely given in to the pension industry lobbyists.
Good marks for intention, none for resistance to financial industry lobbyists.