Private Pensions or NEST – Which is better for you?
NEST pensions have hit the headlines recently for causing a furore in the pensions market.
But what are NEST pensions and would you as a saver be better off choosing them over a private pension?
A Brief Introduction
The National Employment Savings Trust (NEST) is a defined contribution pension scheme for workers in Britain and was rolled out alongside automatic enrolment as part of the swathe of measures included in the Pensions Act 2008.
It’s run on a not-for-profit basis and is administered by the NEST Corporation, which acts as a Trustee.
Members who opt to join the scheme (or are automatically enrolled by their employer) have their contributions put into a NEST Retirement Date Fund. These are arranged according to the life stage of members and each fund is managed differently.
NEST also offers several other fund choices, including an Ethical Fund and one that complies with Sharia law.
How NEST works
As mentioned, NEST operates on a defined contribution scheme, whereby you and your employer pay in a minimum amount of contributions (set by the government), which are used to build up a pension pot you can enjoy in retirement.
While there’s no sign-up fee for employers, members are required to pay a 1.8% charge on their contributions, as well as an annual 0.3% management charge on the entirety of their pot.
There’s also an annual contribution limit, which is reviewed once a year and currently stands at £4,600. Restrictions are also in place to prevent members transferring funds in and out of the scheme, however, this aspect is scheduled for review in 2017.
As such, members won’t be able to access any of their NEST fund until they reach retirement age, which could differ – depending on when you were born. Once this milestone is reached, members can withdraw 25% of their pot as a tax-free lump sum and they must take out all of their funds by the age of 75.
Criticisms of NEST
While the introduction of NEST was welcomed by some parties, there are several drawbacks to the scheme, which might not make it suitable for every saver or employer.
Flexibility:The limit on annual contributions means it’s fairly inflexible for those determined to put away a comfortable sum for retirement. While this may make it preferable for workers on a low-to-moderate income – those looking to save more might be forced to utilise a private pension concurrently.
Charges: The charges that accompany NEST pensions could also be cause for concern for many savers. When combining the annual management charge with the 1.8% contributions charge – the scheme may be more expensive than the average private pension (depending on how much you put in).
Movement: As you’re unable to move any existing pension funds into the pot, this could put those who’ve already been saving for retirement for several years at a disadvantage. Similarly, being unable to move funds out of the pot could mean savers aren’t able to take advantage of more lucrative pension plans or investments.
Risk: Initially, members’ contributions will be put in low-risk funds that invest in cash or gilts. While these offer a measure of security for members, returns are similarly modest. While the option to join riskier funds with the potential for higher returns is always available, the choices on offer are still somewhat limited when compared with private pensions.
While NEST remains a valid pension vehicle, with the potential for several improvements in the coming years, it’s not unequivocally better than private pensions and could be considered inferior to these in several areas. However, whether it’s right for you as a saver hinges on several issues, including:
• Your age
• How close you are to retirement
• Your existing pension arrangements
• Your employer’s choice of workplace pension scheme
• How much you earn
• How much you want to put in your savings pot annually.
If you’ve had any experiences with NEST or want to share your views on how it measures up to the average workplace pension, be sure to fire us a tweet – we love to hear what you have to say.
And if you’re looking for advice on pension planning or any private financial matters, don’t hesitate to get in touch with Pareto today.