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The Nest annuity challenge

More needs to be done to educate people on Nest options

A big challenge for members of Nest is going to be how to get the most from the fund that they accumulate at retirement although for many, building up that fund may be challenge enough.

The answer from Nest was published towards the end of June when it announced a panel of five annuity providers from which members can select. This includes two providers that will offer only impaired life and/or lifestyle rates.

It is not entirely clear how the panel was arrived at although the financial security of the providers, the likelihood that they will remain competitive and the condition that they accept purchase prices as low as £1,500 were undoubtedly all considerations. It may also be that the panel is added to or amended over time although the aim will probably be to keep the choice as simple but competitive as possible.

While Nest may provide a means for annuity purchase for the many retirees who will have accumulated funds under the new arrangement, the choice may still be confusing despite the constricted panel. Couple this with the range of providers and options available in the open market and it is clear that there needs to be a commitment to guidance and education for individuals to be able to make the most appropriate decision.

Perhaps more worryingly, there may well be individuals who have bigger accumulated funds and/or other funds or sources of pension income that they can call upon. Focusing on the Nest fund alone fails to put that into context with the rest of the individual’s pension savings.

For these individuals, the range of options for providing income in retirement is growing in complexity and decisions about levels and design of income can become crucial. Making the wrong choice is arguably likely to create serious issues over a potentially long retirement period.

The potential unintended consequence of the panel approach is that, just at the point individuals need to secure the best possible rate and income shape, they could be guided down a decision path, unaware that there is a more appropriate whole of market solution available to them.

The Government’s drive to promote a culture of financial awareness and saving for retirement is commendable and Nest is an important step in that process. However, much more work needs to be done to educate those approaching retirement as to how best to allocate and benefit from what for the most part will be finite accumulated funds.

This means looking at their overall financial circumstances, whether that is in the period during which they are saving or at the point when they are securing their pension income.

The education process needs to underline the importance of having independent advice.

Mark Pearson is director of business development at Origen Financial Services

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Comments

There are 9 comments at the moment, we would love to hear your opinion too.

  1. Mark l think that you are dreaming along with the government at this moment. The vast majority will opt out and the first hurdle is get people to buy back into pensions as ‘these individuals’ wont this anymore than than did stakeholder.

  2. Hear Hear, but when did any Government, Government Dept. or the FSA ever give a monkeys about the realities of this financial life??
    all any of them care about is what is either politically expediant or career advancing.

    I see 2 more senior FSA officials are now ready to take up their golden goose retirement positions in RBS Bank etc. Enough said.

  3. NEST I smell the next misselling scandal on its way ! Restricted panel of annuity providers, what on Earth are they thinking. GIve the customers the open market option. I am shocked, or maybe not,that the government is even consideringa ‘panel’ after bleating on about customer choice for so long. Will these guys really offer ‘competitive’ annuities or will it just be another cartel. Me thinks the latter, too cosy by half. Any of these providers contribute to party funds ?

  4. Why ever would any annuity provider agree to accept pension pots as minuscule as £1,500? Anything less than £5,000 or probably more is a guaranteed money loser. And what about the triviality commutation threshold of £18,000? Has that been conveniently discarded as far as NEST is concerned? If so, people will be even more inclined to opt out and to resist all attempts to re-enrol them at a later date.

    And why is the government so fanatically resistant to proposals for non-annuity retirement income solutions?

    Here’s the NEST proposition, Mr Shopfloor Worker:-

    1. You’ll be auto-enrolled, whether you want to participate or not and, even if you exercise your right to opt out, you’ll be auto-enrolled again at a later date.

    2. Most of the funds available are just index trackers and we know almost nothing about those that aren’t.

    3. The scheme will be administered by a firm in India and, if they mess it up, there are no alternatives, because nobody else was prepared to submit a tender for the job.

    4. The funds will be administered by a US firm of which most people over here have never heard.

    5. The systems through which the scheme will be operated are brand new, untried and untested.

    6. Your employer doesn’t want NEST and the amount he has to contribute, not to mention his administration costs, will be reflected in your future pay awards.

    7. At the end of the day, the amount of income you can derive from your fund will still be governed by annuity rates.

    8. NEST is a money purchase substitute for the Earnings-Related tier of the State Pension Scheme, but you’ll receive no discounts off your NI Contributions.

    9. NEST was heralded originally as an ultra-cheap alternative to virtually all private sector pension plans, but the government is spending so much money on setting it all up that the whole idea of the scheme being ultra-low cost seems to be fast disappearing over the horizon, never to be seen again.

    10. The government designed the scheme and has steadfastly ignored all calls for a private sector alternative.

    Apart from those minor shortcomings, the government still seems to think that NEST is the best way of addressing the retirement savings gap amongst people who presently aren’t saving enough, if anything at all. What do you think?

  5. Richard Jennings 30th August 2011 at 2:05 pm

    NEST – Never ‘Eard Such Tosh!

  6. I’ve just read in Professional Adviser that the Government’s loan to NEST is, to all intents and purposes, “unrecoverable” (though I think that should be irrecoverable). The agreement allows the terms of the loan to be renegotiated and the loan has been made with no security whatsoever, so if NEST fails, the total amount (of tax payers’ money) that the government’s shovelled into it will just be written off.

    And the final paragraph:-

    The Treasury refused to reveal NEST’s full cost assumptions for the loan because it “could impede NEST Corporation’s ability to operate in a commercial environment”. That’s interesting, isn’t it, given that NEST is manifestly NOT any sort of commercial undertaking (except or the outside contractors) nor, as far as I’m aware, has there ever been any intention that it should be. What has any sort of “commercial environment” got to do with it? Such a statement appears to be complete flannel, perhaps an admission by omission that the whole thing is already costing so much as to raise serious questions as to whether or not it can possibly be worth it and that, in all probability, a private sector solution wouild be eminently more cost effective. You couldn’t make it up.

  7. Just a reminder that although I don’t disagree with what Julian has said above, it was the previous NULibor government who commiitted everyone to NEST, signing the contracts a matter of weeks before the general election so that backing out afterwards would be nearly as costly as trying to continue with the farce of trying to make a silk purse out of a sows ear!

  8. Thanks to Julian for the sales aid…

    This whole thing is just another slow motion car crash..and as it’s post RDR, there won’t be the IFA’s around this time to dig the employers out of the administerative mess that they are going to find themselves in…. All these employees opting out and then being put back in and then back out.. be like musical chairs.. I presume they have liaised with EB specialists as to just how difficult it can be to get any form of decision from employees… just maintaining spreadsheets of who is who can be a full time job.. 🙂

    ‘You couldnt make it up’ – they have.. and they can.. they have the rule book… 🙁 .. and our money… simples…

  9. Hi Julian

    Don’t forget to add to your brilliant sales aid that every pound of NEST pension will result in lost Pensions Credit and I think lost Savings Credit so you will not receive full value of your NEST pension at reirement.

    I think the marginal tax rate will be something like 60% please correct me if wrong.

    J

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