The National Employment Savings Trust (Nest) is the UK’s largest government-backed pension scheme, offered by many employers as part of their employment packages.
Nest was originally set up by the government with the aim of making it easy for employers to offer a pension, after it became compulsory for all employers to provide a workplace pension scheme. Under pension auto-enrolment rules, both companies and their employees must pay a percentage of salary into a pension, and these contributions are topped up by tax relief. Read more in our article How does pension auto-enrolment work?
Here, we explain how Nest works, and what you need to know about this pension scheme.
If you’re considering seeking professional financial advice on the options available to you, we’ve partnered with nationwide independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial advisor. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
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What is a Nest pension?
Nest, sometimes referred to as the ‘auto-enrolment’ pension scheme, is a relatively low-cost, simple pension scheme. It was designed to help both employers and employees pay into a workplace pension scheme that’s easy to manage.
Any employer is able to sign up to Nest, instead of setting up their own pension scheme, to provide a way of saving for retirement to employees. If they wish, self-employed people can also use Nest to save for their retirement. However, it’s not necessarily the best option if you don’t benefit from employer pension contributions. Read more in our article Pensions for the self-employed.
Do you have to pay into Nest?
Under current rules, anyone aged 22 or over earning a minimum of £10,000 is eligible for auto-enrolment. If your employer has signed up to Nest, you’ll be automatically enrolled into this pension unless you don’t qualify for auto-enrolment. While you don’t have to pay into this pension scheme, opting out isn’t usually wise, as you’ll miss out on valuable employer contributions. These can effectively be thought of as a salary increase that you’ll eventually receive in retirement.
If you decide to pay into a different pension scheme, check whether your employer might be able to contribute to this instead. Alternatively, if you can afford to do so, you could pay into both a Nest workplace pension and personal pension scheme to increase your retirement savings. For example, you could also pay into a self-invested personal pension (SIPP) and choose your investments yourself, or you might decide to opt for a simple personal pension, or stakeholder pension. Read more about these options and how they work in our article What are the different types of pension? The most suitable pension scheme for you will depend on which ones you are able to pay into, and your personal circumstances. However, if you’re able to pay into any type of workplace pension scheme, including Nest, it’s usually worth doing.
How does the Nest pension scheme work?
Nest is a type of defined contribution pension scheme, meaning that the amount you receive at retirement is based on how much is paid into the scheme (including your employer’s contributions) and investment performance. Read more in our article What is a defined contribution pension? Your retirement savings in Nest are managed by pension trustees on your behalf, but your employer can determine how much they’ll contribute (provided it’s at least the minimum under auto-enrolment rules, and you can find out more about these below).
Like any other defined contribution pension, you can usually withdraw money from your Nest pension once you reach the age of 55 (rising to 57 in 2028). You can do as you wish with your Nest pension savings at this stage, including taking up to 25% as a tax-free cash lump sum, buying an annuity or income for life, or moving your pot into a flexible drawdown scheme where your savings remain invested and you can draw an income from them as and when you need to. Read more in our article Your pension options at retirement.
Contributions: Your and your employer’s contributions into a Nest pension are calculated as a percentage of your so-called ‘qualifying earnings’ of between £6,240 and £50,270. The minimum combined contribution rate is currently 8%, of which employers are required to contribute a minimum of 3%, and employees a minimum of 5%.
You may be able to pay in more than this, and so might your employer, depending on the limits put in place by your employer, and provided you’ve enough Annual Allowance remaining. You can pay up to £60,000 a year into your pension and receive tax relief on this amount under your Annual Allowance. Read more in How do pension allowances work?
Tax benefits: You’ll receive tax relief on any contributions at your highest marginal rate. Most UK taxpayers automatically get tax relief on pension contributions at the basic rate of tax which is 20%. So, if you wanted to add £100 to your pension, you’d only need to pay in £80, as the government would add the £20 it took in income tax. If you’re a higher rate taxpayer who pays income tax at a rate of 40%, you can claim even more pension tax relief back, so paying £100 into your pension will cost you just £60. Read more in our guide How pension tax relief works.
Investment options: You can choose where your Nest pension is invested depending on your approach to risk, belief or faith. For example, you can choose ethical or Sharia law compliant funds, as well as retirement-dated funds that are aimed at different life stages. All these funds may include diversified portfolios of stocks, bonds, and other assets. The majority of Nest savers choose retirement date funds, which automatically reinvest your money based on your expected retirement date. This means you don’t need to consider whether your investments are suitable for your life stage, as the fund will ensure they are appropriately invested on your behalf. For example, if you are only a few years off retirement, your savings may be invested predominantly in less risky assets such as bonds and cash, whereas if you have a decade or more before retirement, a greater proportion of your savings may be invested in stocks and shares.
Charges: Employers don’t pay for the Nest pension, but employees will pay some charges. Nest has an annual management charge of 0.3%, and you also pay 1.8% on the value of each contribution. So, this amounts to £1.80 on each £100 paid into your pension. Nest states that it keeps costs low by focusing on passive investments, so the underlying funds aren’t actively managed by a fund manager. However, as mentioned, there are a growing number of cheap personal pensions, so make sure to find the most suitable one for you if you’re self-employed and not benefitting from employer contributions.
What happens to my Nest pension if I change employers?
You can keep your savings in your Nest pension to grow over time if and when you change jobs. Alternatively, you may want to move the savings you’ve built up to another pension if you find yourself paying into a different scheme. Consolidating your pensions by having them all in a single pot can make them easier to manage, provided you’ve checked this is a cost-effective option. Read more in our article Should I consolidate my pensions?
If your new employer also offers Nest, you’ll simply continue to pay into this scheme. Once you’ve confirmed that you’re already a member of Nest, you can carry on contributing to your pot. It’s worth checking if your new employer will pay more into your pot if you increase your contributions, as employers can set their own contribution limits.
Considerations if you’re paying into a Nest pension
As a government-backed pension scheme, Nest is considered a low-risk option. However, you should give some consideration to how much you’re paying into your pot, and your investment options, to increase your chances of a comfortable retirement.
Your contributions: The current minimum contribution rates into Nest under auto-enrolment may not be sufficient to provide a comfortable retirement income. Read more in our article How much should I save for retirement? Experts suggest that employees should consider increasing their contributions into Nest or adding savings elsewhere to bolster their retirement savings.
Investment risk: As with any investment, your savings in Nest come with some rise as they are subject to market fluctuations and uncertainties. The value of the pension pot can rise or fall based on the performance of the chosen investment funds. However, a pension is a long-term investment so try not to worry about short-term volatility. It’s worth, though, reviewing your pension fund from time to time to ensure it suits your financial goals and risk tolerance.
Your pension beneficiary: You can choose who inherits your Nest pension when you die by completing the relevant form. This is usually called an ‘expression of wishes’ or ‘pension nomination’ form and can be found in your account when you log in online. Your pension pot will be paid tax-free to your beneficiary if you die before you reach age 75, but your pension beneficiary will be charged income tax on this if you die after age 75. Read more in our guide What happens to my pension when I die?
Further help…
If you’ve a query about your Nest pension you can call Nest on 0300 020 0090, or use the Web chat service. If you’re general guidance with your pensions, the Government’s Pension Wise service provides people aged 50 and above with free guidance on their pension choices at retirement.
If you want advice that’s tailored to you specifically, you’ll also need to speak to a financial advisor. In this case, our guide on How to find the right financial advisor for you might be helpful.
If you’re considering seeking professional financial advice on the options available to you, we’ve partnered with nationwide independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial advisor. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 1,500 reviews on VouchedFor, the review site for financial advisors.
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