Money Help Desk: Save us from pension confusion

LAST week you said the government will introduce a quasi compulsory pensions savings (Money, 12 September). I had heard that from 2012 almost everyone will have to put money into a pension called NEST. Will this affect me and should I stop making pension contributions until NEST comes in?

LP

Tom McPhail, pensions expert at Hargreaves Lansdown writes:

From 2012 some radical new reforms are taking place. The main one proposed is that all employers will have to automatically enrol any employees earning over 5,035 into a pension scheme. It is possible that the Government will decide to set the entry hurdle a bit higher though. We will have to wait and see.

This means that employees will have to opt out of having a pension rather than opting in. As a complement to this reform the government will provide a low-cost pension scheme called NEST (National Employment Savings Trust) which employers can save into if they don't have a pension scheme of their own.

Employers will have to make contributions to the pension schemes of their staff. This will be required to be at least 3 per cent of earnings (between 5,035 and 33,540, although again these salary bands have yet to be confirmed). Employers are at liberty to contribute more if they so wish. If your employer does pay in the bare minimum of 3 per cent, then employees will have to pay in 4 per cent, with a 1 per cent contribution from the government.

These reforms are broadly very positive, and are needed to address the problem that people are living longer but saving less for retirement.

However the introduction of these reforms should not prevent you from continuing to contribute to a pension now. The reforms are being phased in from 2012 but won't be fully operational until October 2017. Stopping pension contributions for seven years will have a seriously detrimental impact on your retirement income.

If you have a group pension scheme you are also likely to miss out on employer contributions, which are on average 6 per cent of salary. Over seven years that would mean foregoing 12,600 of pension contributions from your employer, assuming you earn 30,000.

Automatic enrolment and NEST are currently under review by the new coalition government, so changes may be made to these rules. However it is expected that most of the reforms will remain as planned.