PensionsWith the NEST auto-enrolment pension kicking off in two weeks, we look at exactly what it means for your retirement savings.

From the 1st October up to nine million employees will start being automatically enrolled into a pension scheme that will be linked to investments, such as shares, unless they choose to opt out. If you're one of them, your pay-packet will fall as you contribute to the pension, which is also paid into by your employer.

On top of that, the Government will add tax relief. When you start receiving an income from your pension at retirement you'll pay your taxes then, but you can expect to pay less in taxes overall this way.

Why is this happening?
The programme, called NEST (National Employment Savings Trust), is to get us to start taking more responsibility for saving for our retirement. The idea is to make 11 million future retirees, who aren't saving enough, less reliant on taxpayers and the largess of Government.


Taxpayers – especially future generations of taxpayers – gain by the same token, because they will need to pay less in benefits to retirees in decades to come, merely to give their parents and grandparents a basic standard of living.

Who will this affect?
You'll be automatically enrolled if you're at least 22 but under State Pension age and if you're earning more than £8,105.

When is this happening?
Employees will be auto-enrolled over the next few years, depending on the size of their employer.

The first wave of people will join schemes inside two weeks and the Government expects that 600,000 will be paying contributions into it by the end of the year. By 2015, it expects more than four million to be in the scheme, and the roll out will be finished by 2018.

The schedule is:

Number of employees

Date of enrolment

120,000 or more

01/10/12

50,000-119,999

01/11/12

30,000-49,999

01/01/13

20,000-29,999

01/02/13

10,000-19,999

01/03/13

6,000-9,999

01/04/13

4,100-5,999

01/05/13

4,000-4,099

01/06/13

3,000-3,999

01/07/13

2,000-2,999

01/08/13

1,250-1,999

01/09/13

800-1,249

01/10/13

500-799

01/11/13

350-499

01/01/14

250-349

01/02/14

160-249

01/04/14

90-159

01/05/14

62-89

01/07/14

61

01/08/14

60

01/10/14

59

01/11/14

58

01/01/15

54-57

01/03/15

50-53

01/04/15

Fewer than 30 with the last 2 characters in their PAYE reference numbers 92, A1-A9, B1-B9, AA-AZ, BA-BW, M1-M9, MA-MZ, Z1-Z9, ZA-ZZ , 0A-0Z, 1A-1Z or 2A-2Z

01/06/15

Fewer than 30 with the last 2 characters in their PAYE reference number BX

01/07/15

40-49

01/08/15

Fewer than 30 with the last 2 characters in their PAYE reference number BY

01/09/15

30-39

01/10/15

Fewer than 30 with the last 2 characters in their PAYE reference number BZ

01/11/15

Fewer than 30 with the last 2 characters in their PAYE reference numbers 02-04, C1-C9, D1-D9, CA-CZ or DA-DZ

01/01/16

Fewer than 30 with the last 2 characters in their PAYE reference numbers 00 05-07, E1-E9 or EA-EZ

01/02/16

Fewer than 30 with the last 2 characters in their PAYE reference numbers 01, 08-11, F1-F9, G1-G9, FA-FZ or GA-GZ

01/03/16

Fewer than 30 with the last 2 characters in their PAYE reference numbers 12-16, 3A-3Z, H1-H9 or HA-HZ

01/04/16

Fewer than 30 with the last 2 characters in their PAYE reference numbers I1-I9 or IA-IZ

01/05/16

Fewer than 30 with the last 2 characters in their PAYE reference numbers 17-22, 4A-4Z, J1-J9 or JA-JZ

01/06/16

Fewer than 30 with the last 2 characters in their PAYE reference numbers 23-29, 5A-5Z, K1-K9 or KA-KZ

01/07/16

Fewer than 30 with the last 2 characters in their PAYE reference numbers 30-37, 6A-6Z, L1-L9 or LA-LZ

01/08/16

Fewer than 30 with the last 2 characters in their PAYE reference numbers N1-N9 or NA-NZ

01/09/16

Fewer than 30 with the last 2 characters in their PAYE reference numbers 38-46, 7A-7Z, O1-O9 or OA-OZ

01/10/16

Fewer than 30 with the last 2 characters in their PAYE reference numbers 47-57, 8A-8Z, Q1-Q9, R1-R9, S1-S9, T1-T9, QA-QZ, RA-RZ, SA-SZ or TA-TZ

01/11/16

Fewer than 30 with the last 2 characters in their PAYE reference numbers 58-69, 9A-9Z, U1-U9, V1-V9, W1-W9, UA-UZ, VA-VZ or WA-WZ

01/01/17

Fewer than 30 with the last 2 characters in their PAYE reference numbers 70-83, X1-X9, Y1-Y9, XA-XZ or YA-YZ

01/02/17

Fewer than 30 with the last 2 characters in their PAYE reference numbers P1-P9 or PA-PZ

01/03/17

Fewer than 30 with the last 2 characters in their PAYE reference numbers 84-91, 93-99

01/04/17

Fewer than 30 unless otherwise described

01/04/17

Employer who does not have a PAYE scheme

01/04/17

New employer (PAYE income first payable between 1 April 2012 and 31 March 2013)

01/05/17

New employer (PAYE income first payable between 1 April 2013 and 31 March 2014)

01/07/17

New employer (PAYE income first payable between 1 April 2014 and 31 March 2015)

01/08/17

New employer (PAYE income first payable between 1 April 2015 and 31 December 2015)

01/10/17

New employer (PAYE income first payable between 1 January 2016 and 30 September 2016)

01/11/17

New employer (PAYE income first payable between 1 October 2016 and 30 June 2017)

01/01/18

New employer (PAYE income first payable between 1 July 2017 and 30 September 2017)

01/02/18

Source: The Pensions Regulator

How much will my salary fall?
You can pay in extra in regular amounts or one-off contributions, but your employer will contribute out of its own pocket too.

Minimum contributions include payments from your employer, Government and yourself, and are based on your pre-tax earnings, excluding the first £5,564 and up to £42,475. These figures will be reviewed every year.

The minimum contributions will increase between now and 2018 as follows:

Date

Minimum contributions

Your contribution based on £15,000 salary

Your contribution based on £30,000 salary

Oct 2012-Sep 2017

2%

Of this, you must pay at least 1%

£7.90pm

£20.40pm

Oct 2017-Sep 2018

5%

Of this, you must pay at least: 2%

£15.70pm

£40.70pm

Oct 2018 onwards

8%

Of this, you must pay at least: 3%

£23.60pm

£61.10pm

What might I get in the end, in today's prices?
In today's prices – which means deducting inflation – here's what you might expect to get from your pot, but please bear in mind these are just rough estimates, since we can't predict the future of your investments:

How long you save for

£15,000 starting salary

£22,000 starting salary

£30,000 starting salary

25 years

£4,900 in up-front cash and £900 in private annual income

£8,500 in up-front cash and £1,550 in private annual income

£12,700 in up-front cash and £2,300 in private annual income

35 years

£8,000 in up-front cash and £1,450 in private annual income

£14,000 in up-front cash and £2,550 in private annual income

£20,900 in up-front cash and £3,750 in private annual income

You could perhaps get a lot more if your salary leaps much faster than inflation, e.g. because of a big promotion.

These aren't huge amounts, but you'd hope that they'll nicely supplement State Benefits, and will mean you're less reliant on them. You and your employer can also contribute extra. Doing so in the earlier years in particular is likely to make a massive difference. Retiring later can also hugely increase your up-front cash and annual income.

What should I watch out for?
Costs, diversity and investment choice are the three main things most people should consider when investing.

NEST will work out at an annual charge of around 0.5% for most people, which is pretty good. Add on trading costs and the overall total will hopefully be less than 1%, which is also quite good.

It is certainly diverse, since your money will probably be invested across a wide range of assets. This will help protect you from a massive disaster in on asset, such as a single company going bust and you have half your money in it.

What can I invest in?
However, investment choice is not so good, and this is the third thing to watch out for. With the default fund – which most people don't bother changing – NEST is looking to be very cautious and to smooth out your progress, meaning no big highs or lows. The problem with this approach is, while it's reassuring in the short-term, you should expect it to mean a worse performance in the long run.


I have tried to take that into account with my projections in the section above, but I might have underestimated the impact of this smoothing action, depending on how cautious NEST will be. Time will tell.

The closer you are to retirement, the more cautious NEST will be, which makes sense. You can choose a handful of other funds: ethical, Sharia-compliant, higher risk, lower growth and pre-retirement funds. You can swap between funds at no cost, but be wary of jumping ship after a big fall and hundreds of scary news stories. This is almost always the worst time to do so.

Can I move other pensions into it?
At present, you can't transfer pensions into or out of NEST.

When can I take cash out of the plan?
Your money is locked in until the agreed end date, which is usually around your expected retirement date. Under current rules, you can then take 25% of your pot as tax-free cash and normally you'll then get a monthly income from the rest, guaranteed for the rest of your life.

You can only normally get all your money back straight away if you have been auto-enrolled and you opt out within one month of this happening.

Should I opt out?
It's a good idea to take as much control of your financial future as possible and, the earlier you do this, the better.

That said, if you're struggling with debt, it can make sense to put more money to paying that off.

In addition, consider share ISAs instead, due to the risks of Government tinkering with pensions. Governments can tinker with share ISAs too, but it's probably going to be easier to get all your money out of an ISA, if trouble comes.

Lower earners in particular might find that their contributions come to nothing, because it just means your benefits are reduced in retirement. Therefore you might opt out – although this is hard to predict and could turn out to be just as risky as not saving in a pension. The choice is simply not easy.

Will I be opted in again later?
If you opt out, you'll be automatically enrolled every three years unless you opt out again.



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