Government-backed pension provider Nest – the National Employment Savings Trust – has outlined radical proposals that will give savers using the scheme low-cost, flexible access to their pension cash.
It has also outlined an “automatic” process by which all savers, on reaching a series of age triggers, will be channelled into investments that both safeguard their cash to provide future income and enable savers to spend it as needed.
The plans, published today, go some way towards meeting the aims of this newspaper’s Make Pension Freedoms Work campaign. First, they pave the way for Nest to become a benchmark in low-cost, flexible pension access – currently being denied to many.
Second, Nest’s proposals offer a solution to the problems posed by “lifestyle” funds. As we reported last week, these funds, which hold billions of pounds of pensioners’ savings, were built for savers who would buy annuities on fixed retirement dates – rather than, as now, a flexible retirement where cash can be drawn or invested as savers wish. As a result of this, many such funds are exposing savers to unnecessary market risk.
Second, Nest’s proposals offer a solution to the problems posed by “lifestyle” funds. As we reported last week, these funds, which hold billions of pounds of pensioners’ savings, were built for savers who would buy annuities on fixed retirement dates – rather than, as now, a flexible retirement where cash can be drawn or invested as savers wish. As a result of this, many such funds are exposing savers to unnecessary market risk.
Nest’s research concluded that once savers finally did retire, their money should be managed in three phases linked directly to their age.
Its proposed solutions take into account factors including longer working lives, and assume most savers will have a 30-year-long retirement.
Nest came into being as part of the introduction of “automatic enrolment” into workplace pensions, a policy partly based on Australian experience.
The shape of retirements to come?
The first phase envisaged by Nest is “early retirement”, spanning the decade between someone’s mid-60s and early 70s.
According to its chief executive, Otto Thoresen, at this stage “most savers don’t really know what kind of income they need from their retirement pots now or in the future. So it doesn’t make sense for them to lock their money up in a guaranteed income, such as an annuity. A flexible approach will suit most people best.”
As a result, Nest’s default options would see the money left invested. The portfolio would be designed primarily to protect savers’ money from inflation, so the majority initially would be in shares and commercial property. But there would be two crucial additional features to this stage.
Around 10pc of savers’ pension pot would be kept in cash as an “emergency fund” which could be accessed instantly, at little or no cost to the saver.
Secondly, a small portion of the money (between 1pc and 2pc per year) should be saved in a separate pot, building up a reserve which in future years – when the saver’s financial situation has settled and there is a clearer picture – can be used to provide an income.
In the second phase, when someone is in their mid-70s to early 80s, savers would continue to take a flexible income from their invested capital. But Nest recommends that the money that has been set aside for later life income should now be “locked in” to stop savers dipping into it. This provides a greater degree of security and certainty that an income will be paid for the remainder of an individual’s life.
In effect, it becomes a safeguard against the risk of “outliving” your savings.
And in the final phase, when savers reach their mid-80s and for those who live into their 90s, their money would be converted into an income stream for life through the purchase of an annuity.
Nest’s research found that buying an annuity in your 80s offers better value for money than buying one in your 60s. It also found that savers in their 80s no longer wanted to take investment risk and therefore preferred the certainty of an annuity.
As this newspaper has repeatedly highlighted, millions of pension savers who want flexible access to their money are being, in one way or another, barred from free access to their pension cash.
Until recently buying an annuity has been the default option for millions of over‑55s but in April the Government introduced new flexibilities which – in theory – mean savers are no longer forced into buying a guaranteed income. Instead, they now have unfettered access to their money as well as a wider range of options to keep their cash invested to save or spend as they like.
Nest’s vision is to create a simple, hassle-free path to pension freedom so every saver.
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