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Workplace Pensions NEST – what does this mean to you ?

Auto-enrolment has been the subject of national political debate and has commanded many column inches during the last couple of years but it has now finally arrived. As of 1st October 2012, staff will have to join an existing employer pension scheme or enrol into the National Employment Savings Trust (Nest).

The process has begun for those employers with over 120,000 employees in the UK from the 1 October and this will be phased over the next few years until 2018. Employers with fewer than 58 employees will have to auto-enrol their staff from January 2015.Contributions into NEST will start with employees paying a net contribution of just 0.8% of their pensionable earnings and this will get topped up with tax relief from the HMRC contributing another 0.2%. The employers will have to pay in 1% of their employee pensionable earnings into the scheme.

The contribution limits will finally rise to 4% from the employee, 3% from their employer and 1% in tax relief, giving a total of 8%. The contributions will be invested until the employee retires and they will have to buy an annual pension, or annuity, with their final pension fund.

Staff members who are not already in a company pension scheme will be enrolled if they are between the ages of 22 and the state pension age. The employee must have earnings of at least £8,105 a year, which is the personal tax free allowance.

The employee’s qualifying earnings is the money they earn from £5,564 up to £42,475. So if an employee earns £15,564 a year the qualifying earnings would be £10,000, as the first £5,564 is outside of the band. These figures are for the 2012/2013 tax year and will be reviewed every year by the government. Any earnings above £42,475 will also be disregarded in the contribution calculation.

Employees will have the option to opt out of NEST, and they will be given details of how to do this before their contributions starts. The employer will have a duty to automatically enrol the employee back into the scheme every three years. By not opting into the pension scheme means that the employee will lose out on tax relief and employer contributions which in effect are free money and provide a safety net for retirement.

If an employee is earning £25,000 per annum and had the full 8% contribution rate they would have, in effect, £2,000 contributed into their pension pot each year. If an employee was age 25 and then saved for 42 years before retiring at the age of 68, in line with their state pension age, the total contributions over the term would be £84,000 and would benefit from tax free growth during this period.

If you wonder how this would equate to a pension income-over those 42 years, if there was an average of a 3% a year return on the pension fund then the employee would end up with a total pension fund of £164,093. Based on current annuity rates on offer this could provide a single man age of 68, in good health, with inflation linked annual pension of £5,141 or £428 per month, with an additional tax free lump of £41,009.

Whether you’re an employer who would like some independent advice in terms of how the scheme will affect you or an employee wanting to understand how you can maximise your investment. Then please come and talk to one of our qualified, independent and regulated advisers here at Guardian Wealth Management.

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