Matthews IFA Ltd
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Feathering your NEST!

As an employer, have you begun to prepare to put your employees into a pension scheme? As an employee, has your employer told you anything about the new law which means you will be joining a pension scheme?

The compulsory extension of basic pensions saving by employees will apply to a majority of private sector employees in the UK. Currently, most private sector employees have no pension scheme building up for them through their employer.

Private sector employees aged over 22, earning more than the equivalent of about £160 a week will find themselves automatically enrolled in the new Government savings scheme paying towards a retirement pension, over and above the existing statutory Old Age Pension.

The NEST scheme (National Employee Savings Trust) is being introduced in stages. Large employers, with over 1,250 employees, became obliged to introduce the scheme on 1 October 2012. Another group employing between 250 and 1,249 must be ready by 1 October 2013. Then on or after April 2015, smaller employers must implement the scheme.

The scheme operates with the simple sounding device of auto-enrolment. The reality is more complex and neither employers nor employees can passively do nothing.

Professional advice is highly commended. Maxwell Buchannan, Chief Executive at pensions' advisers, Kerr Henderson, first, acknowledges that the scheme is far from straightforward and, second, points out that employers should take professional advice to convert the requirements of this scheme to suit the interests of the employer and employees.

At first sight the NEST scheme seems simple. Each employee pays a small proportion of eligible earnings (rising to 4%), employers pay a small proportion of payroll costs for these employees (rising to 3%) and the tax advantage from Government brings the total to 8% of earnings when fully operational.

The complications start with the several variants in the scheme.

Employees can opt-out. Some uncertain estimates suggest that 15% to 20% may opt-out. This option quickly points to administrative problems for the employer. Records for each employee must show their accumulated contribution along with that from the employer. An opportunity to reconsider opting out must be given every three years.

Some employees may have earnings below the minimum to qualify. Some employees may have variable working hours that alter their liability to contribute. Part-time employees and seasonal, student or temporary employees will all need to be considered in terms of the formal rules.

Employers must choose how to accumulate the pension savings in the scheme, from the employee and employer contributions. There will be a default investment fund as a part of the NEST scheme. However, employers may wish to retain an approved alternative.
Employers can pay more than the statutory minimum into the personal savings accounts.

Alternatively, an unknown consequence of the NEST scheme may be that some employers will plan to withdraw from existing employee pension schemes. Existing schemes may be converted to an approved scheme. Employers who already have an out-sourced payroll system will be considering the ability of that system to incorporate their variant of the NEST scheme. The arrival of NEST may be the trigger to investigate the out-sourcing of these tasks.

The NEST scheme calls for contributions from each employee and their employer. The phasing in of these contributions must sit beside any other pay negotiations. There is no certainty about any impact on pay rates or an employer's willingness to accept an increase in total labour costs.

As the NEST scheme settles down, employees will begin to accumulate a pension. For employers, there are extra costs and extra administration. Job changing and transfers of entitlement will also add to the complexity of  record keeping.


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