Nest reveals its blueprint for pension freedoms

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Nest has unveiled its “blueprint” for a retirement income strategy in the wake of pension freedoms based around three “building blocks”.

In November Nest launched a wide-ranging consultation on how it should respond to the Government’s freedom and choice reforms.

Its proposals for post-retirement portfolios centre on three strands: an income drawdown fund, a cash lump sum fund, and a later life protected income fund.

Around 90 per cent of a member’s savings will be invested in an income generating drawdown fund, with the remaining 10 per cent allocated to a cash pot to allow ad-hoc withdrawals.

However, members will be able to allocate different proportions between the funds.

The provider says it is not planning to built bank account-style functions into the cash fund.

Between the ages of 65 and 75 regular small payments of around 1.5 to 2 per cent will be taken out of the drawdown fund to pay for “later life protected income”. Members will be free to take a refund on these payments up until 75, at which point they will be locked in unless they opt out.

The protected income, which kicks in at 85 years old, could take the form of a deferred annuity or some form of unsecured risk sharing model, such as a collective defined contribution scheme.

Speaking at a launch event for its retirement strategy in London this week, former Association of British Insurers director general and new Nest chair Otto Thoresen said the scheme would not be running the drawdown element in house. He hinted Nest would follow its model for annuities, where it operates a panel of providers.

Chief investment officer Mark Fawcett said implementing the plan was “several years” away and designed for pots around £20,000 to £30,000.

He said the fact the average Nest member’s pot size was low meant there would be no users for it if it was already in place.

He says: “Since the pension freedoms were announced the challenge to industry has been to help savers achieve a sustainable retirement income without removing freedom and flexibility.

“We believe this is possible but it requires innovation. Many of Nest’s members are the first generation of savers who’ll rely almost entirely on their defined contribution pots and their state pension in retirement. This makes it absolutely critical that we get this right for them.

“We’ve developed an evidence-based blueprint for how to meet members’ needs. We hope this will stimulate the innovation necessary for us and others to deliver what members will need and want.”