On Tuesday 16^th March the government announced the charges expected to be applied to the new NEST (National Employment Savings Trust) pension scheme formerly known as Personal accounts.

The new NEST pension scheme is designed to help boost the level of pension contributions of lower and moderately paid workers. Eventually by 2016 all employees will be automatically enrolled in the pension scheme, unless they decide to “opt out”.

Although it will start to be rolled out from 2012, the auto-enrolment will only apply to large firms employing at least 120,000 people. The minimum contribution at this initial stage will be 2%, of which 1% is from the employer.

Over the next four years more companies will be brought into this net until 2016, where all employers will be obliged to automatically enroll staff into a pension scheme. At this date the contribution levels will be 5%, with 2% of this from the employer. The maximum 8% contribution will not be enforced until at least 2018.  

It is the Pensions Regulator’s responsibility to ensure that employers comply with their duties. Failure to comply could lead to a fixed penalty notice of £50,000, with additional penalties of £10,000 for each day that an employer fails to take the necessary remedial action.

The charges mean an initial charge on all contributions of 2% and an annual management charge of 0.3%. This high initial charge will mean that older workers and those who only contribute for a shorter period could obtain lower charges with existing stakeholder pensions.

This means that if you were to invest £100 for a year into the new scheme the charges would be £2x 12 = £24 but under a stakeholder contract charging 0.5% the cost would only be £6. After around 17 years things begin to go in favour of the new scheme. With these timescales I just dont see the point of the new scheme when existing stakeholder plans would do the job and personal pensions give more fund choice.

The dual-charging structure is to cover the start-up costs of the national pension scheme. Once these costs have been repaid, it seems the 2% fee would be removed – although this may not happen for at least 10 – 20 years.

However, this dual charging system it makes it more difficult to compare the two scheme types thus making it impossible for small business owners to help people decide.

Once again a case of so called “pension simplification” by the government being the reverse in practical terms.

This means employers and employees will need to get qualified pensions advice from an independent financial adviser or face making potentially expensive mistakes.