The new NEST pension scheme isn't bold enough.
It's a fairly well-known fact that the UK faces a potential 'pensions time-bomb'.
A rocky retirement
For example, the mass closure of final-salary pension schemes has taken away guaranteed pensions from millions of private-sector workers.
Similarly, government cutbacks could lead to reduced pension payouts for up to six million public-sector workers.
Hence, the Department for Work and Pensions estimates that at least seven million working-age adults are currently under-saving for retirement.
The nation's NEST egg
In order to tackle the problem of under-saving for retirement, the government is to introduce NEST, the National Employment Savings Trust.
To be launched in 2012, NEST is designed to provide a simple, low-cost pension plan for almost all workers. In effect, NEST is a compulsory, workplace-based pension plan for everyone (except for workers who opt out or already belong to superior pension schemes).
One of the benefits of NEST is that it provides workers with a single pension pot to which they can contribute despite moving from employer to employer. Initially, only large employers will be required to offer NEST to their workers, with smaller employers joining later on.
Initially, contribution levels to NEST will start out low, but will increase over time until the minimum contribution level will hit 8% of earnings by 2017. This will consist of a 3% employer contribution, 4% employee contribution, plus 1% tax relief from HM Revenue & Customs.
Another plus is that NEST will operate on low margins, with long-term costs estimated at 0.3% of a pot's value.
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The big problem
In theory, NEST is supposed to enhance existing pension provision by introducing minimum standards for workplace-based pensions. However, the scheme came under attack today from the Association of Consulting Actuaries (ACA) (pdf).
The actuarial trade body has warned that the NEST contribution of 8% will not be enough to provide adequately for life after work. Indeed, the ACA argues that, for millions of low-paid workers, NEST will simply substitute private savings for state benefits.
To build a suitably sized pension pot, the ACA recommends contributions of half a worker's age. Thus, a 30-year-old worker should receive total contributions of 15% of his/her pre-tax salary, while a 50-year-old employee should pay in 25%. Given that few can afford such hefty contributions, this looks to be another unworkable outcome.
Be bold and brave
Thus, the ACA has urged the government to be bolder in its reform of occupational pensions. It recommends that the state provide tax incentives for a 'middle way' between defined-contribution (alias money-purchase) and defined-benefit (final-salary) schemes.
Thus, employers who provide pension schemes which exceed NEST contribution levels, and meet a certain quality threshold, would be given additional tax breaks to help fund these 'NEST-plus' schemes.
Also, the ACA has warned that the launch of NEST could accelerate a 'race to the bottom', with workers losing out as employers shut down generous existing schemes, to be replaced by basic NEST pensions.
Retirement is your problem
The ACA also added that it 'feels that a huge amount of work needs to be done to embed a culture of financial education necessary to underpin a culture of saving.'
To do this would require rebuilding the public's trust in long-term saving; reducing complexity in the State pension system; making it easier for employers to provide support; and encouraging the widest possible participation in retirement saving.
Of course, all participants in pension reform face a huge uphill struggle in convincing these and future generations to move from 'living for today' to 'saving for tomorrow'.
In the meantime, it's up to each and every one of us to take control of our own retirement planning. This need not be via traditional pension schemes, especially as workplace ISAs gain prominence.
In short, improve your retirement prospects, don't wait for widespread pension reform. By saving in a low-cost SIPP (Self-Invested Personal Pension) or tax-free ISA, you can start to build a brighter future today!
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