Q I don’t currently use the pension scheme offered by the company I work for. But I’ve seen coverage lately of a new company pension plan where employees will be automatically signed up. I think it said only big firms are affected, and the company I work for only has a few dozen employees. Am I right? I already make contributions to my own personal pension. Can you clarify where I stand please?
A J, Perth
AThe initiative you mention is automatic enrolment, which started for the largest employers this month. The plan aims to address the chronic lack of long-term saving for retirement by offering a simple straightforward solution and making it easy and cost-effective for employees to participate. It also makes employer contributions compulsory for the first time.
If you are aged between 22 and 65 and earn a minimum of £8,105 a year you would automatically be enrolled in your employer’s pension or the new National Employment Savings Trust (Nest). Contributions start at a minimum of 1 per cent from the employee and one percent from the employer, rising over time to a total of 8 per cent (4 per cent from the employee, 1 per cent from the Government as tax relief and 3 per cent from the employer).
You do have the choice of opting out, however, it is hoped that most people will elect to join as they do not have to do anything and will automatically begin to save for their own long-term benefit.
The main pension vehicle is Nest. Medium and smaller companies are not yet compelled to consider offering it and will have different start dates between now and 2018, with the smallest companies coming on stream last.
Turning to your own circumstances, I gather your employer has already made a pension arrangement available to you but, like you, is not making a contribution. This will be a stakeholder pension and, as such, will offer reasonably favourable terms.
Unless your employer begins making contributions and becomes exempt from Nest, it will have to offer Nest and start making contributions for you sometime between now and 2018. I suggest you clarify this and find out your company’s start date.
I also note that you make contributions to your own personal pension. You can join Nest and still pay to this or any another pension arrangement. Overall contributions to Nest are currently capped at £4,400 a year.
When you save through a personal pension the fund you will accrue will depend on how much has been contributed, the investment return achieved and also the amount that has been deducted from your savings through charges.
Nest has a charging structure of 1.8 per cent of each contribution made and an annual management charge of 0.3 per cent. The low annual management charge is the more significant of the two charges as this is beneficial when funds grow in size.
Nest offers only three investment choices – cautious, balanced and adventurous, with balanced being the default choice. It therefore suits people who are seeking a simple, straightforward solution
How best to proceed depends on how much you are prepared to save and the degree of investment specialism you wish. Nest is specifically designed to cater for people on modest incomes who are simply seeking a value for money pension option.
l Stephen Hall is a wealth manager at Cornerstone Asset Management LLP.
If you have a question you need answered, write to Jeff Salway, The Scotsman, 108 Holyrood Road, Edinburgh EH8 8AS or email: scotsmancash@yahoo.com. The above is for general purposes only and is not tailored for individual use. It does not constitute legal, financial or investment advice on any particular matter and must not be treated as a substitute for specific advice.
No action should be taken in reliance of the information given. The Scotsman Publications Ltd and Cornerstone Asset Management LLP accept no liability on the basis of this article.