Nest egg for retirement - will you be affected?

Published on 19th January 2010

The compulsory pension scheme dreamt up by the Government that is set to roll out in 2012, has been rebranded the National Employment Savings Trust or NEST for short.

It is estimated that as many as 6 million people will be enrolled into a pension under the NEST scheme in 2012 unless they choose to opt out, and this will include many Contractors. The idea of the scheme is to try and bridge the gap between the income needs of a growing army of retirees and what the state pension can realistically provide. As such the Government are introducing a policy on automatic enrolment to an employee pension scheme.

NEST will encourage employees to build a retirement fund through shared contributions. The aim is for the employer and the individual to each contribute 3% and the Government to contribute 1% however, in order to soften the blow, they are implementing this on a sliding scale. In 2012, the minimum contribution from employers and employees will be just 1% and then this will build over time to the full 3%.

So how will this affect Contractors?

If you operate under an Umbrella company and you do not already benefit from a salary sacrifice scheme then you will be enrolled into NEST plan by your Umbrella in 2012.

Contractors operating a one man ltd company will also be affected and as employer and an employee of your company, you will have to set up a pension scheme and contribute to it unless you choose to opt out. The difference for Contractors compared with permanent employees is that you will have to fund both the employer and employee contributions yourself. If you work through an Umbrella then your service provider will contribute as an employer but obviously this will work in the same way as existing salary sacrifice schemes and both the employer and employee contributions are taken from your earnings.

The good news is that there are significant tax breaks available on pension contributions and many Contractors can currently benefit from as much as 48% tax relief. This not only helps you to build a substantial retirement fund, it also helps you to keep more of your hard earned money out of the tax mans grasp. We recommend Contractors start contributing now rather than waiting until 2012 as you have the opportunity to save tax now whilst benefiting from the current surge in stock market valuations. Even a few years delay will potentially wipe tens of thousands of pounds off of your final pension pot.

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