What is a Nest pension and is it any good?

The National Employment Savings Trust (Nest) is the government-backed workplace pension scheme used by many employers. Lots of businesses opt for Nest to help their employees build a pension fund, instead of setting up their own pension schemes.

Nest pensions work similar to other workplace pension scheme, with contributions both from you and from your employer, and tax relief on all the contributions you make.

If your employer offers Nest you’ll be enrolled automatically. You can opt out, but this usually isn’t advisable and must be done within your one month opt-out period.

What is a Nest pension?

The National Employment Savings Trust (Nest) is a workplace pension scheme set up by the government.

Any employer can use it, rather than setting up their own scheme, in order to fulfil their obligations to provide a workplace pension.

Self-employed people can also use the scheme if they’d like to save for their retirement.

Nest is different from the state pension – it’s a government-backed workplace pension scheme, but the money comes from employers and employees paying in, and not from taxpayers.

How does a Nest pension work?

The Nest pension is a type of master trust that lots of employers can use.

It’s a defined contribution scheme, so you and your employers make contributions to a pot of money that gets invested to help it grow over time.

Your savings will be managed by trustees on your behalf, but your employer can still decide aspects including their own contributions, contribution limits, benefits and how your money is invested.

As with any defined contribution pension, you can access your Nest savings once you reach age 55, rising to 57 in 2028.

When you retire, you can use the money saved in your Nest pension pot to take a regular income (drawdown) or buy an annuity, and you can also choose to take 25% of the pot as a tax-free lump sum.

When you reach the age of 75 you won't get tax relief on any contributions. By then you will need to have accessed your pension pot either via drawdown or by buying an annuity.

How much would I typically pay into a Nest pension?

Pension contributions vary depending on your employer. In the private sector, it’s typical for employees to contribute 5% of their salary to their pension while their employer pays 3%.

By law, workplace pension contributions have to add up to at least 8% of your salary in total, so you may contribute a different amount if your employer pays in more.

The amount you contribute will be set automatically by your employer, but it’s possible to pay in more. You can contribute as much of your pay as you wish, up to the limits imposed by your annual allowance.

If you’re a higher-rate taxpayer, you may be eligible for a tax rebate via your tax return due to your pension contributions. Although NEST automatically claims 20% on your pension contributions, you may be owed an additional 20% pension tax relief.

How much will my employer pay into my Nest pension?

Your employer will pay at least 3% of your net salary into your Nest pension, making your total contributions 8% at minimum.

They may pay more, for example matching your contributions, or even exceeding them.

It depends on the employer and how keen they are to attract the best talent by offering an excellent pension.

What are the costs and charges of a Nest pension?

The Nest pension is free for employers, but employees have to pay some fees.

You’ll pay an annual management charge of 0.3% on your total pension pot each year, which covers the cost of running the fund and making investments.

In addition, you pay 1.8% on your contributions. So, if you contributed £100 a month, £98.20 would go into your fund (where it then would be boosted by 20% tax relief).

These fees are designed to pay off the government loan used to set up Nest.

How is my money invested in a Nest pension?

Your savings are pooled together with those of other members and invested in a range of assets, companies and industries.

You do have some options about your investment approach.

You can choose ethical and Sharia law compliant funds, as well as funds that are designed for different stages of life (e.g. if you are closer to retirement you may want lower-risk funds).

Lots of people opt for retirement date funds, which are invested and reinvested dynamically to generate the optimum and risk-balanced gains for your expected retirement date.

This option means you don’t have to keep thinking about whether your pension is in the right fund for your time of life.

What happens to my Nest pension when I move jobs?

What happens when you change employers depends on whether your new employer also uses Nest. If they do, they’ll simply enrol you back on to it and you just need to sign a form to confirm that you’re already a member.

If your new employer uses a different scheme, however, you could either keep your Nest account or transfer your pension to another provider.

Whether or not it’s cost-effective to switch depends on aspects such as fees and the performance of the funds. Having said that, it often makes sense to consolidate all your pensions to make them easier to manage, but it’s worth getting financial advice beforehand.

What happens to my Nest pension when I die?

You can nominate a beneficiary, who will be given your pension when you die.

The pot will be paid to them tax free if you die before you’re 75, but they will be charged income tax on it if you die after age 75. Find out more about how pensions are inherited.

Is the Nest pension any good and are there any risks?

Broadly speaking, the Nest pension is a low-risk pension scheme. It’s backed by the government, which offers a level of security for savers and employers.

However, this doesn't necessarily mean the NEST pension is low-return.

Depending on what funds you'd like your pension to be invested in, you could take on different levels of investment risk that would, in turn, affect your returns.

On top of their standard Nest retirement fund, there are currently six different NEST funds to choose from, ranging from the lower growth fund to the higher growth fund.

If you'd like to take on more investment risk to boost your returns, you can do so; however, it is always a good idea to check with a dedicated financial adviser beforehand.

What are the alternatives to a Nest pension?

If your company has auto enrolled you into Nest, it usually makes sense to stick with your employer scheme to make the most of employer contributions.

However, it can make sense to also invest elsewhere, especially if you’re aiming to retire early or want to boost your pension savings.

You could opt for a personal pension, self-invested personal pension (SIPP) or a stakeholder pension.

SIPPs are a type of personal pension that allows you to make your own investment choices and usually have a wide range of funds to choose from.

Stakeholder pensions are similar but have capped charges and a smaller and simpler choice of investing options.

Should I opt out of or cancel my Nest pension?

If you’re enrolled on a Nest pension through work, then opting out of the scheme might mean you lose out on contributions from your employer.

Before choosing a different pension, you should speak to your employer first to find out if they’d be happy to contribute to a personal scheme instead.

If the answer is no, you may be able to increase your contributions or open a personal pension alongside your workplace scheme.

Deciding what’s best for you depends on your circumstances, the schemes available to you, and your retirement goals.

Pensions are complex, so you should speak to a qualified financial adviser before touching your pot to make sure you’re not losing out by transferring your savings elsewhere.

What are the advantages and disadvantages of a NEST pension?

Advantages

• It is government backed
• Contribution flexibility
• Tax relief on contributions

Disadvantages

• Limited choices of funds
• Some restrictions on transfers
• The pension contribution fee is expensive

How do I contact Nest pensions?

You can contact Nest pensions by telephoning 0300 020 0090. 

For other ways to get in touch, including their help centre and live chat, you can visit their contact us page here.

Get expert financial advice

Whether you’re trying to find the right pension scheme for your employees or are working hard to build a healthy retirement fund, financial advice can help.

Unbiased can quickly match you with a qualified financial adviser who can help you build a retirement plan, including deciding on the right pension scheme.

Did you find this article useful? Then you might also find our article on alternatives to traditional pensions and our free pension guide informative, too!