Workplace pensions: the alternatives to NEST

Workplace pensions: the alternatives to NEST

Auto-enrolment, also known as workplace pensions, is well underway. It's the biggest pensions revolution in history.

The Government scheme requires employers to enrol eligible workers (aged between 22 and the State Pension age and earning over £10,000 a year) into a workplace pension.

Under the new rules employers and the Government contribute to the pension, on top of an employee's own pension contributions.

Workplace pensions were launched back in October 2012 to address the problem of people living longer but failing to save enough money for retirement.

It's being introduced gradually, with the biggest employers first, while small employers still have a couple of years before they need to enrol their staff.

Over five million workers have been enrolled so far, but by 2018 as many as nine million employees across the UK will be automatically entered into a pension scheme by their employer.

Get more tips in the Axa Investment Academy

Saving a NEST egg

The National Employment Savings Trust (NEST) is the auto-enrolment programme set up by the Government to support the launch of the auto-enrolment initiative.

NEST is effectively a public body that's accountable to the Department for Work and Pensions. But it's far from perfect.

And it's not the only auto-enrolment scheme provider that employers can use. Indeed, the scheme that your employer chooses to use can make a difference to the pension pot your finish with.

Let's take a look at the main alternatives.

The People's Pension

The firm behind The People's Pension is B&CE, a company which has managed workplace pensions – particularly in the construction sector – for more than 30 years. So there's some decent pedigree there, with more than 9,000 firms currently using B&CE to manage assets worth more than £2.2 billion.

JD Sports, Pret A Manger, Matalan, Wilkinson and Marriot UK are just some of the big companies that have chosen The People's Pension for their auto-enrolment responsibilities.

How is your money invested?

There are three profiles to choose from which will determine how your money is invested: Cautious, Balanced and Adventurous. The names tell you all you need to know about the level of risk involved with the investment strategies of each.

You'll be entered into the Balanced fund unless you ask to be moved to a different investment profile. If you're more confident about investing generally, you can actually self-select the exact funds you want to invest in from a selection of seven, including a Sharia fund and an ethical fund. You can switch between funds without charge.

If you've stuck to one of the three main profile funds, your money will automatically be moved into more secure investments on a gradual basis from 15 years before your planned retirement date. This doesn't happen if you have chosen to self-select.

Charges, transfers and contribution caps

One of the big attractions of The People's Pension is that it is a not-for-profit organisation, which means that the charges are very low – there's just a simple, flat 0.5% annual management charge to pay. That's much easier to get your head around than the NEST fee structure of 0.3% per year plus a 1.8% contribution charge.

It's also worth noting that if you're auto-enrolled with the People's Pension you can transfer in money from other pensions without penalty. You won't be able to do this with NEST until April 2017.

What's more, there is no limit to the annual contributions you can make to your pension. This is in stark contrast to NEST, which allows no more than £4,600 (in 2014/15 terms) to be paid into a pot each tax year. NEST plans to lift these restrictions by April 2017.

Get more tips in the Axa Investment Academy


NOW:Pensions is backed by Danish retirement specialists ATP, which has run the Danish National Pension for more than 45 years, and is coupling that Scandinavian experience with people like Nigel Waterson, the chair of the board of trustees, a former Shadow Pensions Minister.

Fitness First, Cineworld Cinemas and Randstad are just a few companies which have chosen Now:Pensions for their auto-enrolment obligations.

How is your money invested?

NOW:Pensions has used its experience in Denmark to put together an interesting investment approach. Indeed, there's just one default investment plan.

Your money is split across five different risk classes, each with different risk characteristics.

The Rates class invests in Government and other bonds, which have a low credit risk. Also invests in interest rate derivatives.

The Credit class invests in bonds with credit risk or in funds with similar investments.

The Equity class invests in equities, equity derivatives or in funds with similar investments.

The Inflation class invests in index-linked Government and other bonds, as well as inflation and interest rate derivatives.

The Commodity class invests in commodity derivatives or in funds with similar investments.

This is called the diversified growth fund.

NOW:Pensions employs two distinct phases over the life of your pension saving: the savings phase, and the pre-retirement phase.

During the savings phase, your cash will be invested in the classes listed above through the Now: Diversified Growth Fund. Once you reach the pre-retirement phase (ten years before your planned retirement date, though you can change this to five or 15 years before that date) your money will start being moved into less risky investments contained in the NOW: Retirement Countdown Fund.

This lack of choice may concern some, but NOW points to its excellent track record of running pensions in this way. And its own research found that the vast majority of people who are auto enrolled in a pension simply stick with the default option anyway.

Charges, transfers and contribution caps

Simplicity and transparency are the key words when it comes to charges with NOW: Pensions. There's a 0.3% annual management charge, coupled with a monthly administration fee of £1.50 (which falls to 30p for those earning less than £18,000 a year, at least initially).

Transfers can be made absolutely free if handled online and again there is no cap on contributions.

Smart Pension

Smart Pension is the latest contender to NEST. It was founded by experienced finance and technology professionals in 2014 and has been designed particularly to support smaller companies facing the challenges of auto-enrolment.

Its main selling point is it's simple and quick for employers to set up. Using a range of processes to speed things along like e-signatures Smart Pension says it can sign up, enrol employees and get a company fully compliant within a matter of minutes. You can even do it from your mobile phone.

Get more tips in the Axa Investment Academy

How is your money invested?

To make things simple there's one fund called the Smart Pension Master Trust.

A team of independent professional trustees with decades of experience between them invest the scheme's assets as per the trust deeds at the lowest possible cost.

The trustees also select the investment manager, responsible for investment strategy of the Smart Pension Master Trust and its assets. Currently Lewis Capital Management, a pioneer in the application of behavioural sciences to investment management, merging traditional techniques with behavioural finance and investor psychology is on board.

The Lewis Capital Management team invests pensions funds in the largest blue chip funds (such as Legal & General) to provide protection as well as sourcing opportunities for growth for a fully diversified default fund.

Like the other schemes mentioned Smart Pension employs a different approach as people come up to their retirement age. Risk and volatility are reduced by shifting the proportion invested into cash and fixed income over equities.

Charges, transfers and contribution caps

Employees enrolled on the scheme pay a monthly Assets Under Management (AUM) fee of 0.75% per annum of funds under administration. This is line with the UK fee cap coming into force from April 2015. Plus Smart Pension charges a direct debit fee of 1% or up to a maximum of £2 as a proportion of all employees' contributions.

For example, if 20 employees earning the average UK salary of £26,000 are each contributing a total of 8% of their qualifying earnings to their workplace pension, the combined total of their qualifying earnings paid every month will be £2,697.07. The direct debit fee of £2.00 will amount to 10p per employee or 0.07% of the employee's pension contribution that month.

Smart Pension allows fee-free transfers and hasn't got a cap on contributions.

Other providers

Employers aren't obliged to work with any of these companies. If your employer already offers a pension with another provider, there's a good chance that your employer will stick with that provider.

Read more on AOL Money

Pension pot raiders could face massive tax bills

Workers are turning down generous pensions

Budget 2015: pensions and savings changes explained

7 ways to improve your retirement
See Gallery
Workplace pensions: the alternatives to NEST

If, like many Britons, you have failed to save the cash you need to maintain a comfortable standard of living in retirement, one option is to sell your home and downsize to a smaller property, using the money leftover to cover your living costs.
If moving out of the family home is too much of a wrench, however, the good news is that equity release schemes allow you to stay in your house or flat while still using the equity built up in it to provide some extra cash. The downside of the schemes, which work a bit like mortgages, is that you may not have much left to pass on to any children or other relatives.
But that's a small price to pay for a reasonable standard of living. For more information, try Age UK on 0800 169 6565.

Choosing the right annuity can have a significant impact on your retirement income. And as with most pensions, you automatically have what's called an 'open-market option' (OMO), you can scour the market for the highest annuity rate.
It is worth checking what your pension provider is offering first, though, as some companies offer guaranteed rates for existing customers that are likely to beat those available elsewhere. The Pensions Advisory Service on 0300 123 1047 is a good place to get some free advice.

On retirement, most people convert their pension fund into a guaranteed income annuity that pays out the same amount every month for the rest of their lives.
However, you can also choose an increasing annuity that pays out smaller amounts in the first few years but offers larger payments further down the line. This may prove a wise move if the rate of inflation remains at over 2%.

It is now easier to work later in life because the "default retirement age" has been scrapped.
People approaching retirement age and worrying about money can therefore choose to work for a few years longer - potentially transforming their financial situation. Other than the extra income from working, these people can look forward to higher state pensions, and higher annuity rates due to their greater age.
They can also benefit from bigger tax allowances and the fact that they no longer have to pay National Insurance contributions. Check out this nidirect website for more details.

You could get a much better rate with an impaired-life annuity if you have a medical condition that is likely to reduce your life expectancy.
Incredibly, even snoring, which is a common symptom of Sleep Apnoea could have an impact.
According to figures from MGM Advantage, a man with this condition could receive an extra £12,000 retirement income over the course of their retirement - or £571.44 extra money each year. Click here to find out more.

To maximise your retirement income, it is vital to ensure that you are receiving all the benefits to which you are entitled. These include the basic State Pension, and in some cases, the additional State Pension.
If you are on a low income, you could also qualify for the guaranteed element of Pension Credit, while those with some savings may get the savings element of this benefit. For more information about these and other benefits such as the Winter Fuel Payment, click here.

Many older couples rely on the pension income of one person - often the man. Should that person die first, the other person can therefore be left in a difficult position financially.
One way to prevent financial hardship for the surviving person is to take out a joint life annuity that will continue to pay out up to 67% of the original payments to the surviving partner should one of them die.
The disadvantage of this approach, however, is that the rate you receive will be lower. Again, the Pensions Advisory Service on 0845 601 2923 is a useful first port of call if you are unsure what to do.


10 Best Places in the World to Retire
Read Full Story