Company pensions explained Auto-enrolment and NEST

Auto enrolment and Nest

Nest is a low-cost workplace pension scheme set up by the government to aid auto-enrolment

In October 2012, the government introduced new rules to encourage more people to save for retirement. 

This process is called auto-enrolment. It means that you will be automatically placed into your company's pension scheme.

This guide explains the basics of how it works. 

Auto-enrolment - the basics

Since 2012, employers have been obliged to offer a qualifying pension scheme to their employees.

All workers who earn above a certain amount (£10,000 a year in 2016/17) are automatically enrolled into a pension scheme. 

If they work for a large employer, this will have happened in October 2012. For those working for medium and small companies, all staff must be enrolled into a pension by 2016. 

You can ‘opt out’ and leave the scheme, but only after they have been automatically made a member.

Go further: Pensions auto-enrolment explained - find out more about the new rules in our dedicated guide.

How much do I contribute?

The minimum amount you and your employer have to contribute under auto enrolment will gradually increase between 2012 and 2018. It is a percentage of 'qualifying earnings' (between £5,824 and £43,000 in 2016/17). 

  • From 2012 to 2017, employees contribute 0.8% plus 0.2% tax relief, employers 1% (overall minimum is 2%)
  • From 2017 to 2018, employees contribute 2.4% plus 0.6% tax relief, employers 2% (overall minimum is 5%)
  • From 2018 onwards, employees contribute 4% plus 1% tax relief, employers 3% (overall minimum is 8%)

Many existing occupational schemes and company sponsored group personal pensions already qualify, but will be extended to take in a greater proportion of the workforce. Employers without a scheme can set up one of their own or enrol their workforce into the National Employment Savings Trust (NEST).

National Employment Savings Trust (NEST)

NEST is an independently-run defined contribution (DC) pension scheme, specifically designed for low-to-moderate earners and those whose employer has no existing scheme. It will also be open to the self employed who wish to set up a personal pension.

  • NEST members will be restricted to an annual contribution limit of £4,700. This is the combined total from the member, their employer and the government (via tax relief). The minimum employer contribution will be 3% of qualifying earnings in 2018.
  • NEST charges for members have been set at a 0.3% annual management charge and an initial 1.8% charge on contributions. For most people, these will be lower than existing DC schemes, which typically charge an annual management charge of 1%.
  • NEST investment choices will be limited to a five default funds and an ethical fund. They incorporate lifestyling, to reduce risk as a member nears retirement.

More on this...

Last updated:

May 2016

Updated by:

Paul Davies

 

Which? Limited (registered in England and Wales number 00677665) is an Introducer Appointed Representative of Which? Financial Services Limited (registered in England and Wales number 07239342). Which? Financial Services Limited is authorised and regulated by the Financial Conduct Authority (FRN 527029). Which? Mortgage Advisers and Which? Money Compare are trading names of Which? Financial Services Limited. Registered office: 2 Marylebone Road, London NW1 4DF.