Updated 03 December 2020
Nest is the government 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. It works like any 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.
Here’s what you need to know about Nest pensions and the benefits of having one.
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 a straightforward way to save for their retirement.
Please note that 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.
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 like 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. 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 the scheme closes to you, so by then you will need to have accessed your pension pot either via drawdown or by buying an annuity.
Currently, the minimum you can pay into any pension scheme you’re enrolled in, including Nest, is three per cent of your salary. If you wish you can pay in more than this, up to the limits imposed by your employer or by your annual allowance, whichever is lower.
Your employer will take your contributions after tax is paid, so you’ll need to calculate the amount you pay based on your net income. You do, however, recoup that tax via pension tax relief.
Your employer will pay at least 5% of your net salary into your Nest pension, making your total contributions 8% at minimum. They may well pay more, for example matching your contributions, or even exceeding or doubling them. It depends on the employer and how keen they are to attract the best people by offering an excellent 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 would be boosted by 20% tax relief to become £122.75). These fees are designed to pay off the government loan used to set up Nest.
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, lower-gain 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 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 move your pension pot out of it. Whether or not it’s cost-effective to switch depends on aspects like 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.
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.
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, it’s also a low-return pension scheme, so it might not be suitable for all savers. And although it is seen as a low-cost option, you may find other schemes are cheaper if you shop around.
If your company has auto enrolled you onto Nest but you’d prefer to save for retirement using another scheme, you could opt for a personal pension, self-invested personal pension (SIPP) or a stakeholder pension.
A personal pension is a scheme that only you contribute to, and may offer you more control than a Nest pension. If you want to decide how and where to invest your pot, you could opt for a self-invested personal pension and do the investing yourself (if you’re experienced) or pay for your own fund manager. The other alternative is a stakeholder pension, which is a defined contribution scheme that employers can offer and people can take out personally. With stakeholder pensions, the amount you contribute is really flexible, but you may not have as much choice over where your pot is invested.
If you’re enrolled on a Nest pension through work, then opting out of the scheme might mean you lose out on your employer’s contributions. 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 to avoid losing their input. The only really good reason to opt out of a workplace pension is if you’re in danger of exceeding your lifetime allowance.
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 pension adviser before touching your pot to make sure you’re not losing out by transferring your savings elsewhere.
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