Nest pension contributions in doubt as savers tighten belts

With pension contributions under pressure as savers tighten their belts, more information is needed on the National Employment Savings Trust (Nest) scheme to ensure employees maximise their retirement incomes.

Enrolment in Nest – which is due to begin in 2012 – looks set to disappoint, according to two reports from pension providers. 

An estimated 35% of pension-scheme members have put their contributions on hold, according to Prudential (PRU.L). If savers in existing company pension schemes, which are generally better than Nest, have decided to opt out, it's likely that many low-income employees will decide they cannot afford Nest contributions. With a minimum contribution of 4% of gross earnings, Nest will take a big chunk out of take-home pay.

Long-term cost of opting out

The Pru’s nationwide study reveals that one in three of those who have put pension payments on hold have done so because they are out of work, while more than a quarter, some 27%, say that they can no longer afford the contributions. Even more worryingly, 43% of those who have stopped paying into their pensions do not plan to start again, despite the long-term impact it will have on their retirement income. The Pru calculates that a saver who misses a year of gross contributions of £2,400 could see their final pension fund reduced by £7,000. 

‘Tightening your belt when times are hard is sometimes necessary, and putting pension contributions on hold might seem an easy way to save money,’ says Vince Smith-Hughes, head of business development at Prudential. ‘However, neglecting pensions today means throwing money away tomorrow, as savers will miss out on perks, such as tax relief and employer contributions.’ 

Women face pension shortfall

A survey from Friends Life reveals that although most employees continue to make contributions, the squeeze on incomes means that any increase has been minimal. Overall, the rolling 12-month average pension contribution for men and women rose by £9 over last year, less than £1 a month, bringing the average contribution to £276 a month.

Average contributions are in line with inflation, but as Friends Life points out, these levels will not be sufficient given the current lack of pension savings in the UK and an ageing demographic. In addition, women’s pension contributions have declined by 5% in real terms, and on average women’s contributions are 38% lower than men’s at £200 a month compared with £324. 

‘Women seemingly have a tougher challenge ahead than their male counterparts,' says Martin Palmer, head of corporate benefits marketing at Friends Life. 'This is particularly concerning given that average contributions are already too low. It is vitally important that all customers, and especially women, focus on the long term to make adequate preparations for their retirement.’

Nest advice imperative

Clearly, if families have to pick between paying the mortgage or making pension contributions, the latter will be sacrificed. But in many cases it isn’t just belt-tightening that has caused individuals to discontinue pension contributions. According to the National Association of Pension Funds (NAPF), public confidence in pensions has hit a record low as incomes have been squeezed followed the credit crunch. 

The perceived inflexibility and cost of pensions and recent heavy falls in the stock market are to blame for the lack of confidence, according to NAPF. Joanne Segars, chief executive of NAPF, wants to see the state pension reformed with a simple, single-tier system that would remove the penalties that low-income families suffer as a result of means testing of retirement benefits.  

Risks to means-tested benefits

Loss of benefits is a very real problem. As pensions expert Dr. Ros Altmann pointed out at the recent Lib Dem conference, ‘More must be done to warn certain people they may be better off not saving into a pension.’ For anyone who cannot afford to save more than £10,000 a year – and that is likely to be the majority of the population – an ISA is probably a better and more flexible retirement savings vehicle, unless the employer is making a significant contribution.

‘I am worried about people in their 50s, low paid, maybe renters, who will actually be the first group of people to retire under this auto-enrolment system, who will have paid a 1.8% upfront charge and who may find their pensions savings have delivered them very little,’ Altmann warned.

If people on lower incomes end up worse off as a result of joining Nest because of losing free non-contributory benefits, the reforms could face a backlash from employees. Savers need more information on the effect Nest will have on their entitlement to non-contributory benefits such as housing benefit and council tax benefit, which can be worth many thousands of pounds a year.