Why does Nest have stricter rules than other pension plans?

I am a partially retired GP and receive an NHS GP pension and a state pension. I enjoy helping patients and still work part time.

I stopped working full-time in 2018 and set up a defined contribution pension with Nest, the government-sponsored National Employment Savings Fund, and my employers pay pension contributions as do I.

I give my GP salary to a charity because I no longer need it.

I selected the Sharia Fund within Nest and it has grown a lot since I invested. Of the total present value, my personal contributions account for 54.4 per cent, tax relief 13.6 per cent, my employers 3 per cent and value growth 29 per cent.

Nest charges 1.8 percent of all funds sent to it, but I think the performance is worth it. However, there are drawbacks.

First, Nest doesn’t allow you to withdraw 25 percent of funds completely tax-free. It insists that each and every withdrawal comprise 25 percent paid tax-free, with the other 75 percent taxed at the emergency rate of 41.3 percent.

Any refund must be claimed from HMRC via the annual tax return; this can easily take six months to receive.

> How Claiming ’emergency’ tax on pension withdrawals: Steve Webb explains

Secondly, if you want to transfer money from Nest to another, more flexible pension provider (where you CAN withdraw 25 per cent of your money tax-free and leave the rest invested), you need to withdraw ALL of it at once.

This rather inflexible approach means that “flexible reduction” cannot be achieved with Nest. It’s definitely all or nothing.

Even if you want to opt for an annuity, this is not available on Nest; Instead, you should take your pension fund elsewhere.

This seems anomalous for a pension organization set up by HM Government, which wants us to be able to use our defined pension funds however we want, including providing a lifetime income.

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I like Nest as an organization and would have liked to have been able to stay with it longer, given its professionalism and excellent performance.

The phone advisors are top notch and as honest as the day is long (Joshua, take a bow!). But Stiff Little Fingers was more flexible than Nest.

Why is this state of affairs allowed to persist? It’s 2024! I would be interested in your perspective.

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Steve Webb responds: Nest, the National Employment Savings Fund, is now the country’s largest pension scheme in terms of membership.

The annual report for 2022/23 shows that Nest had 12 million members, of which just under five million were actively trading and the remaining seven million were “inactive” but had a fund from a previous job.

To understand the restrictions it has encountered, it is worth looking at why Nest was created in the first place and the special role it plays in the pensions landscape.

But I also have good news about possible relaxations of at least some of the limitations they have faced.

When the Government was setting out the framework for “automatic enrollment” in workplace pensions, it realized there might be a problem.

What if the Government imposed a legal obligation on employers to establish and pay a workplace pension, but an employer could not find a pension provider willing to take on its business?

This could be a particular problem for smaller employers and those with low-paid workers who might not be profitable for a private pension provider.

To overcome this problem, the Government created Nest, a not-for-profit pension provider with a legal obligation to accept any employer who wishes to use it to meet its automatic enrollment obligations.

Since 2012, Nest has played an important role in ensuring that millions of working people, particularly for small businesses, can build up a pension with a well-managed pension plan.

The private pension industry was content with Nest covering employers who would not be commercially attractive, but opposed the idea of ​​receiving public subsidies just to compete with the private market in areas that were already being served.

Partly to avoid potential legal challenges from the private sector (and the EU), Nest was limited in what it could and could not do.

Initially, Nest was only allowed to provide pensions to workers up to a certain maximum salary, could not accept transfers, and was not allowed to offer post-retirement products.

It’s important to remember that Nest was created before the days of ‘pension freedoms’, where people can now choose what they want to do with their pension ‘money pot’.

When Nest was created, virtually its entire customer base was supposed to withdraw their small fund in retirement or, in the case of larger funds, use it to purchase an annuity.

Pension reduction of the type you describe was at the time mainly something that served the more affluent and advising section of the market, so it wasn’t something Nest really had to think about.

In terms of your own options at retirement, you’re right to say that Nest currently only allows one type of pension withdrawal.

It involves withdrawing money from your pension in monthly “chunks”, with each chunk being 25 per cent tax-free cash and 75 per cent taxable.

However, you will be pleased to know that last summer the Department for Work and Pensions published a response to the consultation confirming its intention to allow Nest to provide what is called “flexible access reduction”.

This would mean members could take all of their 25 per cent tax-free cash in one go, leaving the rest invested and with future withdrawals taxed in full.

We don’t know exactly when this facility will be introduced, but it is in the pipeline.

Regarding your question about partial transfers, this is an area where Nest aims to provide a simple, no-frills basic pension.

One way to keep costs down when offering pensions to 12 million people is to limit the range of options open to members, and this is a case where Nest does not offer the flexibility that another plan would.

In terms of the ability to use your Nest pension to purchase an annuity or “life income”, you are right to say that Nest does not currently provide this internally.

That said, I would in any case recommend anyone with a deep-pocketed pension to shop around on the open market to find the best deal, and that should give you plenty of choice, regardless of whether your own pension provider offers annuities or not. .

Nest is currently reviewing what it offers its members after retirement.

It currently has relatively few people with significant pension funds who want to continue investing after retirement, but this number will grow markedly in the coming years.

Nest currently offers a ‘Guided Retirement Fund’ which combines withdrawals, access to available cash and a possible move to a later annuity, but is considering what more could be done in the future.