Will contractors be forced to build a NEST egg?

Pensions minister Steve Webb confirmed last week that every company, regardless of size, would have to sign up to NEST. With the Federation of Small Businesses up in arms, we turn to Contractor IFA Tony Harris from ContractorFinancials for advice on what the changes will mean for freelancers...

Tony Harris writes:

The scheme is due to come into force in 2012 but will be phased in gradually, starting with the largest employers in 2012 and working down to companies with fewer than 50 employees in 2014/15. The level of contributions will also be phased in so that employers and employees can steadily absorb the cost of this investment but in reality we think it unlikely that contractors will ever join the Government's scheme in its current form.

Employer contributions will start at one per cent for employees earning over the threshold of £7,475 per year until 2016. This will then climb to two per cent in 2016/17 and then three per cent thereafter. However, as contributions are calculated on a salary over £7,475, many one man limited company contractors will be spared the impact of NEST altogether because, unless caught by IR35, the bulk of your income will be taken as dividends.

Umbrellas

If you operate through an umbrella company, you will be automatically enrolled into NEST or a NEST equivalent when your umbrella is told they must provide a scheme. Given the varying sizes of umbrella companies this will be at any point between 2013 and 2016 but your umbrella will be informed one year before they must join and will tell you the date that contributions must commence.

If you are enrolled into NEST or an equivalent then your contributions as the employee will be one per cent until 2016, three per cent in 2016/17 and four per cent thereafter but you will face a double whammy because you will also fund the employer contribution as above. These contributions will be taken directly from your gross pay but will also attract a further one per cent contribution from the Government.

NEST isn't all bad news however as it will almost certainly encourage contractors and 'permies' alike to look at the issue of retirement planning with renewed vigour. The message from Governments of all political persuasions is increasingly that the state can only provide the most basic of safety nets in retirement and self provision will undoubtedly be the key to a decent standard of living.

Opt out

ContractorFinancials offers:

• Income Protection/Permanent Health Insurance
• Pensions
• ISAs
• Mortgages

Further positives to come from last week's announcement included the ability for contractors to opt out of NEST if required and also that there is likely to be a three month qualification period before new employees will be compelled to join a scheme.

In reality NEST will almost certainly not be the most likely pension vehicle for umbrella companies and one man limited company freelancers to choose because an equivalent SIPP, personal or stakeholder pension will satisfy the new requirements whilst offering a far greater number of investment fund options and will also potentially offer much more flexibility at retirement.

NEST will also be hampered by initial 'establishment' charges of two per cent of each investment because the Government is allowing the Indian conglomerate behind the scheme to recoup set up costs from early investments and for this reason alone we have been contacted by numerous umbrella providers in the past week who are looking to put in place a more suitable 'Nest equivalent' solution.

Tony Harris

Contractor Financials (Pensions)

Tony Harris is Managing Director of ContractorFinancials, an Independent Financial Adviser that specialises in offering financial solutions tailored to your freelance status. For advice on the recent pensions changes or to speak to a pension specialist about your requirements, call 0845 062 8888 or fill in our contact form.