A question about : NEST vs company stakeholder
Hi everyone
My company will start auto-enrolment in the next few months.
They already had an existing stakeholder scheme which I didn't join but they have now converted that to an auto-enrolment qualifying scheme. I did look into stakeholders a couple of years ago when I was self-employed but the annual fees seemed quite high and I never really felt it was worth it unless an employer was contributing as well.
As well as the Friends Life stakeholder they have also added a NEST scheme and the initial employer contribution for both is 1%, rising to 3% in Oct 2018. Even though those percentages are not great it still makes sense to join and not opt-out since it is basically free money.
The NEST annual charges seem quite reasonable, a 1.8% contribution charge and an annual charge of 0.3%. This compares to 0.45% in the Friends Life plan.
I have a few questions...
1) Are there any reasons that anyone knows of that I should avoid NEST and go with Friends Life?
In terms of charges NEST seems better, but my normal scepticism of anything government-backed is still in the back of my mind.
2) With NEST would I be able to use that as a qualifying scheme with future employers?
Obviously if a future employer offers a more attractive scheme then it might not be worth it.
3) Tax relief. Additional contributions to NEST are made directly rather than through the employer. Additional contributions are apparently given tax relief (I think) but how is this applied if it's not going through the employer's PAYE declaration?
4) NEST offers a few other funds including a higher risk fund (https://www.nestpensions.org.uk/sche...est-funds.html) which appears to have a higher stock market exposure. I would think that a higher risk fund might make sense for something like a pension which is a long term investment, therefore short term market variation will have less of an impact. Is my theory correct?
Our longer term plan is to buy an investment property in the next 5-10 years or so although to do that we will probably be making smaller pension contributions during that time. I'm thinking the key to retirement planning though is diversification. Initially I'm not planning on pumping loads of money into this pension, maybe an extra 1-2% on top of the minimum contribution. Though in a way I suppose it makes sense to put a bit more in at the start as the long term benefit will be higher.
Apologies for these basic questions. Having been self-employed for a long time I had always meant to get this sorted out and now I'm faced with a choice between two pension schemes.
Thanks, gbg
Best answers:
- 3) Assuming you are a standard rate tax payer there are two ways that tax and pensions is handled:
- Most employers take pension off your gross pay before calculating tax and so you never pay tax on the pension amount and dont get a rebate
- Alternatively the money comes from your wages after tax. In this case NEST will reclaim the tax back from HMRC, so more goes into your pension than is deducted from your wages.
So in both cases it is all handled automatically and there is nothing you need do beyond checking that what should happen does happen.
4) Your theory is correct - Fantastic. Thanks for the info!
Is there any reason as to why I shouldn't choose NEST over Friends Life?
Thanks, gbg - I've just been through this today.
NEST has an upper contributions limit of Ј4,600 pa. Therefore if your combined employee/employer contributions is more than Ј383.33 per month it's no good.
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