NEST Pensions Explained [The Experts Guide to Workplace Pensions]

Anthony Burgess (Pension & Investments)

Written by Anthony Burgess (Pension & Investments) on May 15, 2018

Updated December 9, 2021

NEST pensions

Planning and saving for your pension can often feel like a pointless activity, especially when retirement feels like a world away. No matter what age you are, looking to the future and ensuring you have a decent pension lined up to support you in your later years is vital.

The lack of interest in pensions was a cause for concern. The government estimated that roughly thirteen million people were not saving enough to give them a reasonable retirement income. In 2008, the government established The Pensions Act to ensure that as many as individuals as possible were saving for their retirement and futures. This Act introduced initiatives such as auto-enrolment and workplace pensions as well as the NEST pension programme.

What is auto-enrolment?

Auto-enrolment means that all employers in the UK must enrol their employees into a workplace pension if they meet the pre-determined criteria. Any worker in the United Kingdom who is aged between 22 and state pension age and earns at least £10,000 per annum must be auto-enrolled for a pension by their employer unless the worker specifically chooses to opt out.

The pension schemes used by employers must meet or exceed specified legal standards, and employers are required to make a contribution to their workers’ retirement savings. As not every employer has access to their own suitable pension scheme, the government funded the creation of NEST workplace pensions. The government department responsible for pensions is the Department for Work and Pensions, and their primary role is to manage activity for the reform programme and agree on policies with ministers while overseeing the delivery of these pension policies.

While you can opt out of auto-enrolment, the fact that your employer will pay into your pension and you will benefit from tax relief too. If you choose to opt-out, you will be automatically enrolled again every three years or if you change employer.

What is NEST?

NEST stands for ‘National Employment Savings Trust’ and is a workplace pension scheme that is run as a trust by NEST Corporation. NEST is run with the interest of its members in mind and has no shareholders or owners; NEST Corporation is simply a trustee of the workplace pension scheme. As NEST Corporation is a non-departmental public body, it can still be held accountable in parliament and reports to the Secretary of State for Work and Pensions.

Employers are not required to use NEST for their employees’ pensions. However, it is one of the pension schemes that are available to them and meets all legal requirements. NEST is open to any employer in the UK who wants to use it to fulfil their duties for their eligible employees. It is the only auto-enrolment pensions scheme in the UK that is required to be open to all employers regardless of their size or business value.

Members of NEST are able to opt out of the scheme within one month of being automatically enrolled if this one-month deadline is missed they can stop making contributions into the plan, but anything already paid in will remain there until they are eligible to withdraw the funds or transfer it to another pension scheme.

NEST was designed to provide an easy to manage, online service for both its members and employers. For employers, NEST provides online tools such as communication templates, pre-set enrolment types and electronic member opt-outs to make it easy and simple to follow current pension requirements. It is possible for an employer to use NEST alongside another pension scheme, allowing them to offer different schemes for different groups of workers.

Other people, as well as your employer, can pay into NEST pensions. This can work well for relatives who want to support their young relatives. Helping with a pension can provide peace of mind for a potentially more comfortable future.

How does NEST work?

NEST allows every employee to get the most from their pension savings easily and effortlessly. There is no need to be an expert in pensions; all that needs to be done is to make your contributions, which is usually done automatically for you by your employer. Contributions that are made by you will be added to by contributions from your employer. Furthermore, these funds stay with NEST until you are eligible to take them out or until you transfer them to another scheme.

If you are eligible for a NEST pension, and your employer is part of the scheme, you will be auto-enrolled, so your savings and contributions will start automatically. Your employer will take the minimum required contribution from your earnings and deposit it to your NEST account on your behalf; they will also add their own contribution as required by law.

NEST offers an online account, so you can easily track your savings and make additional contributions as and when you wish, however, even if you do nothing at all your NEST pension will still be saving in the background and be available to you when you are eligible to take it out. A NEST pension can be taken with you from job to job, making it easy to keep your pension savings in one place. If you stop working for a while, the pension pot will still be there when you start again, and you can even continue paying into it as and when you please.

For workers, there is not too much of a significant difference between a NEST pension and a privately run occupational pension, as the saving and investing is almost the same. The main difference is that a NEST pension generally has lower charges associated with it, compared with private pension providers. NEST is limited to a 0.3% annual administration charge on your savings, and a 1.8% charge on extra contributions.

As NEST is a workplace scheme, you can only be enrolled in it by an employer or if you are self-employed. If you are auto-enrolled and want to leave the scheme, it is possible to do so at any time, but the funds already in your account cannot be withdrawn until you are eligible to receive your pension; although they can be transferred to another pension scheme if you wish.

If you have the budget, try and increase your pension contribution alongside every pay rise you get. It is one of the easiest ways to save even more without even thinking about it.

What are the benefits of NEST?

While NEST is a great, low-cost option for employers to meet their auto-enrolment duties, it is also important to look at how beneficial it is for workers and employees saving for their future. There are a huge number of other pension schemes available, but what are the benefits of choosing NEST?

1. Low cost
NEST pensions have an Annual Management Charge (AMC) of 0.3%, as well as an additional charge of 1.8% on extra contributions. This overall cost of savings is minimal and helps workers save as much as possible for their retirement fund.

2. Auto-enrolment
Auto-enrolment is now a requirement for employers, but it is also a huge benefit for employees. There is no need to spend time signing up to a chosen pension scheme as this is all done automatically on your behalf by your employer. It also means a large number of young people who may not yet be considering their pension or thinking about their future savings, will be auto-enrolled and start making savings much earlier than they would if they were left to join a pension scheme on their own.

3. Low paid and part-time workers

Unlike other pension schemes, NEST gives everyone the ability to save for their future, even individuals who work part-time or are on a low income. NEST will help individuals to save within their means and top up their savings with an employer contribution.

4. Choice of investment funds

NEST pensions offer a range of different investment funds that you can choose to invest your savings in. You can allocate your money as you wish between the available funds, and these funds cover various areas of the UK population.

5. Easy online management

The simple and secure online portal allows you to manage your pension savings at any time, from anywhere. You can track your savings and employer contributions, make additional contributions and manage the funds you choose to invest in from the NEST online portal.

6. Not for profit

The NEST pension scheme is run by NEST Corporation which is a not for profit organisation that manages the scheme as a trust. This means you can relax knowing the company managing your retirement savings is not using it to make a profit for themselves, they are focused on helping you save.

7. Award-winning investments

NEST has won many awards across the globe for its methods on investing its member’s money, including the Best European Pension Fund and Best Small Pension Fund at the Investment and Pensions Europe Awards 2016.

8. Re-enrolment

If you are auto-enrolled to the NEST pension scheme by your employer and choose to opt out or stop making contributions, you will continue to be automatically enrolled every three years if you are still eligible. This gives you an ongoing chance to change your mind about your retirement savings, and the opportunity to join the scheme even if you have already previously opted out.

9. Early access
Many private occupational pensions offer early access to your savings, and NEST pensions are also eligible for some of these early access options.

10. Available to the self-employed
While NEST was designed and created to help employers meet their new auto-enrolment criteria; the scheme can also be used by self-employed individuals wanting to save for their retirement.

What are the negatives of NEST?

NEST has an abundance of benefits that we have covered above, but the negatives should also be considered when looking into a NEST pension. NEST does come with some drawbacks that could make the scheme unsuitable to specific individuals.

1. Additional contribution charges
NEST will take a 1.8% charge from any additional contributions made into your pension savings, and while there is no restriction on how much can be paid into your NEST pot, you may be required to pay additional tax if contributions go over the government’s annual allowance of £40,000.

2. Limited fund choice
While NEST offers a range of different investment options for individuals to invest their savings, the number of investment choices is relatively limited when compared to other pension providers. In addition to this, NEST does not provide any past performance figures for their investment funds.

3. Workplace only scheme
As NEST is a workplace scheme, accounts can only be opened by employers or those who are self-employed. It is not possible to open a NEST pension on your own.

4. Subject to inheritance tax

Funds saved in a NEST pension scheme can be subject to inheritance tax, which is often not the case with other pension providers. NEST is currently the only pension scheme that doesn’t give trustees full discretion when deciding who should receive a lump sum death benefit. This means that the value of the lump sum is counted as part of the deceased estate and is therefore subject to inheritance tax.

Workplace pension rules and how NEST can help?

In 2008, the Pensions Act introduced new rules and regulations for workplace pensions in the United Kingdom. These regulations apply to every workplace and employer and were designed to ensure every worker has a fair chance to save for their retirement and future.

The Pensions Act 2008 requires every employer to provide a workplace pension scheme to their employees, and this scheme has to meet specific standards. The majority of workers will need to be automatically enrolled into a pension scheme by their employer, and other workers have the ability to join the scheme if they choose to.

As well as making their own contributions into their pension pot, workers also benefit from a contribution from their employer and from the government. The regulations of the Pensions Act have been rolled out slowly over the last few years. The minimum contributions starting at 1% of an employee’s income. This rose to 3% in April 2018, with employer’s contributions at 2% and is set to increase again to 5% in April 2019 with employer’s contributions set at 3%.

The companies affected by the rules were also introduced slowly, starting with large companies and rolling out to smaller companies over six years. As of April 2018, all employers must meet the rules of the Pensions Act.

Workers must be automatically employed in a workplace pension scheme by their employer, and they will have one month to opt out from the date of enrolment. Once enrolled, they will make the necessary contributions for as long as they are employed or choose to move their money to an alternative pension pot.

These contributions are based on the qualifying earnings, which for the tax year 2018/19 is everything over £6,032 and below £46,350. The government reviews these figures on a yearly basis. The minimum contribution from workers is currently 2.4% of earnings between these two figures.

When the Pensions Act was created it became apparent that some companies may struggle to provide a workplace pension scheme that could auto-enrol all their employees, and that many would not legitimately be able to afford a private pension scheme. NEST was created to overcome this problem and provide every employee and employer with a workplace pension scheme that was affordable and met all the new regulations.

If you have had previous workplace pensions but have lost track of them, then you can find them using this Pension Tracing Service. When you have found them, you can transfer them to your preferred pension pots and make sure you do not lose out.

Can I make personal contributions and work contributions?

Once you are a member of NEST you have a retirement pot that can be used for your entire working life. The easy to use online account allows you to check your savings at any time and also make additional contributions. You and your employer will automatically make the minimum required contributions which will be a percentage of your pay.

Your employer may have decided to contribute a higher percentage than the minimum requirement, and if this is the case, they would have informed you when you were enrolled in the scheme.

Additional contributions can be made either as a one-off payment or on a regular basis, and there are no restrictions on how much you can save with NEST. Be careful of additional tax that will be paid on any contributions over the annual allowance set by the government. When an additional contribution is made, NEST charge an amount of 1.8% as they are deposited into the account. All charges and additional contributions can be monitored using your online account.

Don’t forget your tax relief! As well as employer contributions, you can claim tax relief. If you pay higher income tax (40%), then you could claim a tax refund for extra tax relief as long as you submit a tax return.

What are the alternatives to NEST?

Although NEST was set up specifically to help employers meet the regulations introduced with the Pensions Act 2008, it is not the only option for auto-enrolment into pensions. There are a range of other workplace pensions that offer similar services and also meet the minimum requirements of the Pensions Act. Here are some of the main alternatives for workplace pensions:

NOW: Pensions

Backed by Danish retirement specialists ATP, NOW: Pensions combines a Scandinavian experience with high profile names such as Nigel Waterson, a former Shadow Pensions Minister who currently sits on the board of trustees. ATP has run the Danish National Pension for over 45 years and uses their experience in Denmark to provide an intriguing investment approach.

They provide one default investment plan, where your money is divided across five different risk classes that each has their own risk characteristics. It is called the diversified growth fund and includes:

• Rates Class: invests in government and other similar bonds that have low credit risks.
• Credit Class: invests in funds with similar investments and bonds with credit risks.
• Commodity Class: invests in commodity derivatives and funds with similar investments.
• Equity Class: invests in equity derivatives and equities.
• Inflation Class: Invests in index-linked government and other bonds, and interest and inflation rate derivatives.

The workplace pension scheme has two distinctive phases for pensions: the savings phases and the pre-retirement phase. The savings phase involves cash being invested into the diversified growth fund. The pre-retirement phase is either five, ten or fifteen years before your planned retirement date and is when your savings are moved into less risky investments. The NOW: Pensions scheme has a lack of choice and options on what happens with your savings, which is a concern for some.

NOW: Pensions charge a 0.3% annual management charge as well as a monthly administration fee of £1.50 for those earning over £18,000 or £0.30 for those earning less. They provide no limit on the additional contributions that can be made to the pension pot, and the transfers are free of charge. NOW: Pensions pride themselves on transparency and simplicity of their charges and fees.

The People’s Pension

B&CE have managed workplace pensions for over 30 years and have created The People’s Pension to assist companies with their auto-enrolment responsibilities. Currently, over 9,000 firms use B&CE for their pensions, and the company manage assets worth over £2.2 billion.

The People’s Pension offers three profiles for investment; Cautious, Balanced and Adventurous. The risk involved which each of these profiles is relatively self-explanatory from their names and gives individuals some choice in how their funds are invested.

When auto-enrolled, everyone is automatically entered into the Balanced fund unless specified otherwise. The People’s Pension allows you to move between profiles and choose what funds within these profiles you want to invest into. They offer seven funds to choose from, including an ethical fund and a Sharia fund. It is entirely free to switch between funds whenever you choose. For those who have stayed with one of the three main profile funds, money is automatically moved to a lower risk and more secure investment 15 years before your retirement date.

The People’s Pension is a not for profit organisation and so offers very low charges to their savers, they charge a flat 0.5% annual management charge with no additional fees or charges. Money can be transferred to and from other pensions free of charge, and there is no limit on additional contributions.

Smart Pension

Smart Pension was founded in 2014 by experienced finance and technology professionals and was designed to assist smaller companies with their auto-enrolment responsibilities. It prides itself on being quick and easy for employers, offering auto-enrolment for employees within a matter of minutes. It can achieve this by utilising technologies such as e-signatures and mobile devices to speed up the process.

Pension savings are invested into one fund, the Smart Pension Master Trust. It is overseen by a team of independent and professional trustees who invest in the scheme’s assets at the lowest possible cost. This team of trustees handpick the investment manager who is responsible for the investment strategy. Like with the other schemes mentioned, Smart Pension change their strategy when retirement age is approaching, by reducing the risk of the investments.

Smart Pension charge a monthly Assets Under Management (AUM) fee of 0.75% per annum of funds under administration. They also allow free fee transfers and unlimited contributions.

Finding the best pension fund for your needs will require you to have a retirement plan. By knowing the lifestyle you want and the budget you can need, you can start investing and choosing pension plans accordingly.

How to transfer money into NEST

NEST allows you to move money into your pension pot at any time so that you can consolidate all your retirement savings in one place easily. Only certain types of transfer payments will be accepted. To transfer into your NEST pot, they must be funds from an existing UK-based pension that is registered with the HMRC. In addition to this, it must be a defined contribution scheme, a pension credit transfer, or an early leaver cash transfer.

A defined contribution scheme

A pension scheme where contributions are paid to build up a pot of money is known as a defined contribution scheme. When it comes to retiring, the amount you will receive depends on the number of contributions and tax relief, as well as any investment growth. NEST works as a defined contribution pension scheme and differs from a defined benefit scheme. A defined benefit scheme aims to pay out a specific income amount on retirement; NEST does not accept transfers from defined benefit schemes.

A pension credit transfer

If you have been awarded a portion of someone else’s pension, usually as a result of a divorce, end of a civil partnership or a pension sharing order, it is a pension credit transfer. A pension credit transfer can be paid into a NEST account unless it is a ‘disqualifying pension credit’ which is where the pension share was paid at the time of the pension sharing order being awarded by a court.

An early leaver cash transfer

If you have been paying contributions to another workplace pension scheme for more than three months but less than two years, and the value of the pot is over £50, it can be transferred to a NEST pension account. This type of transfer can be easily requested online through your NEST account.

How to move money out of NEST

If you have stopped contributing to your NEST pension, you can transfer the money out at any time into another pension scheme. There are no fees associated with transferring funds out of your NEST pension, and the value of the funds depends on both the growth of your pot during its investment and how you want to take the funds out of the NEST scheme.

Funds can only be transferred to another UK based pension scheme that is registered with the HMRC, or a Qualifying Recognised Overseas Pension Scheme (QROPS). Money transfers out of your NEST account can be requested through your online account, which will trigger an information pack on transferring funds to be sent to you.

What to do if an employer uses NEST?

If you are earning over £10,000 and between the age of 22 and state pension age, it is a legal requirement for your employer to auto-enrol you to a workplace pension scheme. They will also be required to make additional contributions to your pension savings. If you have been auto-enrolled to NEST and want to continue saving for your pension there is nothing you have to do; contributions will be made automatically on your behalf into your NEST pension until you decide otherwise.

If you want to get more involved in your pension savings, you can make additional contributions by logging into your online NEST account; you can also specify which funds you want your money to be invested into.

Your employer will inform you in writing of any workplace pension schemes that you have been enrolled to. If you decide not to save for your retirement but have been auto-enrolled to NEST, you can opt out within one month of enrolment. Opting out means you will not be making any contributions or be part of a workplace pension scheme. If you have chosen to opt out of a workplace pension such as NEST, you will be automatically enrolled every three years; you can ask your employer when their next re-enrolment date is. If you are not eligible for auto-enrolment, but your employer uses NEST, you may still be able to ask to be enrolled and depending on your situation they may still be required to make a contribution towards your pension. There are three categories of eligibility for a NEST pension and where you fall in these categories determines if you will be auto-enrolled or can voluntarily opt-in:

1. If you are over 22 years old and below state pension age and earning over £10,000 you will be automatically enrolled, and your employer must make minimum contributions.

2. If you are between the ages of 16 and 22, or over state pension age, and earning over £6,032 you will not be automatically enrolled but can ask to join NEST. Your employer will be required to make a contribution should you choose to participate.

3. If you are between the ages of 16 and 22, or over state pension age, and earning less than £6,032 you will not be automatically enrolled but can ask to join NEST. Your employer will not be required to make a contribution for you.

There are lots of online tools available to help you calculate your pension savings and how much you need to contribute to give yourself a retirement that you want. For example, the Money Advice Service offers a pension calculator to work out how to achieve the target income you would like in retirement.

How can I get the best pension deal from NEST?

NEST pensions are invested into a range of different companies, industries and sectors designed to help your retirement savings grow. As a default, NEST invests your money into a fund that is based on your estimated date of retirement, called Retirement Date Funds. These are specifically tailored to maximise the investments for the estimated year of retirement. If you do not want to leave the investment decisions down to NEST, you have the opportunity to choose to invest into other funds within the NEST scheme.

The additional funds range from ethical funds, Sharia Law funds, high risk funds and more. It is completely up to individuals to choose how they want to invest their pension within these funds, and as with any investment, there is a chance of funds rising and falling. Getting the best deal for your NEST pension is dependent on how you choose to invest your money within these funds. Tip: If you need help understanding your pension options, then there is support available. The government has set up Pension Wise which is designed to give free and impartial pension advice.

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