Government Eggs on NEST to Make Pensions Cheaper

Those taking advantage of the new pension freedoms could see the cost of doing so fall dramatically as the Government’s own retirement saving vehicle – the National Employment Savings Trust (NEST) – is planning to enter the market and undercut the fees charged by private providers.

NEST currently provides a scheme for workers saving for retirement, but the Department for Work and Pensions has announced plans to allow it to offer new, more flexible services to over 55s who want to spend their money.

NEST is pledged to offer the cheapest flexible pensions in Britain and by being part-funded by the taxpayer is believed to be planning to offer ‘suicide pricing’; unsurprisingly this announcement has been roundly criticised by private pension firms, whose fees are likely to be driven down as a result.

However well intended, the promise that pensioners could access their pension pots like a bank account was not always matched by the pension providers capabilities and a survey revealed that pensioners were being charges anything up to 2.76% for going into ‘drawdown’ on their accounts.

‘NEST is pledged to offer the cheapest flexible pensions in Britain’

Fearing that these charges were costing pensioners hundreds of pounds a year, City watchdog The Financial Conduct Authority launched an official probe into excessive charges and threatened Britain’s biggest pension companies with a possible charge cap.

When a saver reaches a series of age triggers NEST’s proposition is expected to automatically select investments that both safeguard their cash to provide future income and enable them to spend it as needed.

Those over 55 with money saved elsewhere will be able to transfer funds to NEST thereby avoiding the need for expensive financial advice.

NEST’s ‘one size fits all’ proposition manages a retiree’s money in three phases over an average thirty year period, linked directly to their age:

• Phase 1 – mid-60s and early 70s – flexible income while saving a small amount for later life.
• Phase 2 – mid-70s to early 80s – flexible income as well as setting aside money for later life.
• Phase 3 – mid-80s and 90s – guaranteed income for life via the purchase of an annuity.

NEST was launched in 2012 as part of the Government’s auto-enrolment initiative to ensure that all employees in the UK have access to a workplace pension.

The NEST pension is certain to divide opinion; whilst the adviser community will doubtless point to the benefits of a bespoke service that selects investments according to individual circumstances, others may welcome the simplicity and cost benefits offered by NEST.

By offering such a pension NEST has gone some way from its original remit to deliver a savings product and some would question the probity of a partially state-funded product entering a seemingly well served market; however, by imposing punitive charges the pensions industry may conclude that it contributed to its own misfortune in no small way.

Otto Thoresen, chairman of Nest, said: ‘As Trustee of a pension scheme with over 3 million members, we believe we have a duty to ensure our members can access their money in ways that work for them. Nest now needs the flexibility to develop and deliver different approaches, to give our members real choice within the new freedoms and to recognise that working patterns are changing fundamentally.’