Automatic enrolment makes it compulsory for UK employers to offer you a workplace pension that both you and the employer pay into. Pension auto-enrolment is meant to encourage us to save enough money to enjoy a comfortable retirement. Under auto enrolment, UK employers are legally required to set up a workplace pension, put all their qualifying employees into it and contribute to their pension savings.
NEST is the main pension provider for auto-enrolment and is government backed. “NEST Pensions” and “auto-enrolment” are often used interchangeably but are different – auto-enrolment are the rules and regulations that makes sure employees are signed up and contributions are made, NEST Pensions is where the money is kept.
The UK government introduced Auto Enrolment in 2012 to address the high number of UK workers who were not saving enough for their retirement by helping more people put enough aside in their pension savings. Since then millions of employees have been auto enrolled and are saving for their retirement with their employer’s help.
The new auto enrolment pension laws were phased in between 2012 and 2018 but by now all companies should be enrolled and offering workplace pensions to their eligible employees.
A significant feature of Auto-Enrolment is that eligible employees are automatically “opted in” and must actively chose to opt-out. This key feature was included to help increase take up by making the default option to join the workplace pension against the fear that whilst many would be happy to be savings for their retirement there was a natural lack of inertia to sign up.
Under the current rules full-time and part-time employees must be automatically enrolled in their workplace pension scheme if they:
If you earn less than £10,000 then you are not auto enrolled, but if eligible and earning above £6,240 then you can apply to join your workplace scheme and your employer will be unable to refuse you and must make contributions on your behalf.
As discussed above, the old system of ‘opting-in’ to a workplace pension scheme no longer exists and employees now have to ‘opt-out’ within one month from the date they’re enrolled, and if they do nothing they will automatically join the scheme. This means that your pension contributions will be taken automatically from your salary on your behalf and you need to actively opt out if you do not want to participate (if you are eligible).
Nest (National Employment Savings Trust) is a workplace pension scheme set up by the government that acts as a relatively low cost and easy to use scheme for employers. Many employers were signing up to provide workplace pensions for the first time, and Nest was created to make sure there was an easy to use, low cost default option specially designed for auto-enrolment. Nest is a Defined Contribution pension scheme.
Any employer can use Nest in order to fulfil their obligations to provide a workplace pension and Self-employed people can also use the scheme if they’d like a straightforward way to save for their retirement.
Employees who join Nest (either voluntarily or through being automatically enrolled) are placed by default into one of their “retirement date funds”. These default funds are designed around how long you have left until retirement and make investment choices on this basis. Nest offers several other fund choices, including an Ethical Fund and also one compliant with Sharia law.
Please note that although Nest is government backed it is entirely separate from the UK State Pension. Nest is an arm-lengths scheme that the government has set up for employers/employees who must contribute themselves into a pension pot, the tax payer does not contribute.
The amount that must be paid into an auto enrolment pension has been rising since it was introduced and is now at 8% (of your salary) for the April 2020 to 2021 tax year. This 8% is split between you, your employer and the government.
Employers must pay at least 3% of this (but can pay in more), and you will be required to pay in 4% of your salary with the government contributes the final 1% through tax relief. If your employer puts in more than the 3% minimum then you may put in less, as long as the total reaches 8%
Your earnings in this case are your employment earnings before income tax and national insurance are deducted.
Auto-enrolment was introduced to help with the growing problem in the UK of workers not actively saving enough for their retirement. People are living longer, and so time spent in retirement (that needs to be paid for) is also increasing. The state pension is not enough to give most retirees the lifestyle they expect in retirement and not enough workers were proactively joining company schemes to supplement their state pension, with many smaller employers not offering them at all.
Auto enrolment is designed so that workers who want to build up savings for retirement can do so without having to take any action themselves. Employees are signed up by default and need to opt out (to help participation levels), there is a low cost default pension provider (Nest) for employers to use and employers are required to pay a certain amount into their employees pension.
Opting employees in automatically has been the most prominent feature and whilst it was controversial when it was introduced it has been very effective, with a great deal more having workplace pensions than before.
There is no requirement forcing you to join or contribute to a workplace pension. Many feel that it is money used that could better be spent on current living costs or invested elsewhere. While there may be instances where it is not advisable to join a workplace pension, for most it will be the financially correct decision. This is largely down to the employer contribution, which can be seen as “free money” as it will be lost without the pension scheme.
Savings early and regularly towards a pension is one of the best ways to ensure you have a comfortable retirement, and even small sums paid in can have a big difference later on in life. Please get in touch if you would like a discussion around what may be the best pension option for yourself or family.
If you move jobs you will no longer be enrolled in your workplace pension scheme and your employer will no longer have to contribute into your pension. Depending on the rules of your workplace scheme, you still may be able to pay into it or you can choose to move the pension savings you’ve built up into your next workplace pension or your personal pension. Whatever you choose to do, the money will still be locked up until you are 55 years of age (due to rise to 57 by 2028).
Instead of having several pensions dotted around (and potentially some forgotten), a pension adviser can help you transfer all of your old pensions into one easy-to-manage pot. Transferring your pensions will give you greater much visibility and control helping you to maximise the growth and tax efficiency of your retirement savings
Before transferring an Auto Enrolment (or any) pension pot you should make sure that you won’t lose any guaranteed benefits or be charged costly exit fees. If unsure then please contact a trusted Independent Financial Adviser.
The Nest pension is designed to be a very straightforward, low cost way of saving for your retirement. The main driver of its success has been both this simplicity and low cost, and also the auto enrolment aspect which has encouraged many to save for their retirement.
There are however several choices for where to put your pension savings, and if you are now ready to explore pensions savings a bit more you may find yourself better off moving away from this simple starter scheme.
One of the main drawbacks from Nest is the lack of choices and control, with the fund choices being criticised for being too low risk and low-return. Everyone’s retirement planning is different, but the more choice of invest options that there are, the more likely it is that you will find one that is the right fit for you and gives the greatest potential returns for your situation (age, risk etc). And although Nest is seen as a low-cost option, you may find other schemes are cheaper if you shop around or offer more for a similar level of charges.
Other pension plans can be held alongside a Nest pension if you decided you wanted to contribute more than the 3% Nest minimum, or you may have old workplace pensions that you want to consolidate into one private pension. Other pension types you could opt for include a Personal Pension Scheme, A Self Invested Personal Pension (SIPP) or a Stakeholder Pension. If you are unsure if you wold benefit from transferring your Nest pension then please speak to a finance professional to make sure, as mistakes around pensions can be costly.
Understanding the workplace pension schemes you are paying into and how much you can expect to receive in retirement is an important first step in making sure you will have enough for your retirement.
Comparing your current workplace pension against other methods of saving for your retirement will help you work out if our workplace scheme is the right one for you.
Getting in touch with an independent Pension Adviser for a free initial discussion is a good way to gain some insight into what the alternatives are, how you can compare and what the next step would be.