Personal Pension  

Nest feathers pensioners’ choices

Nest feathers pensioners’ choices

In its latest report, entitled The Future of Retirement, Nest has outlined a low-cost three-tiered retirement income strategy that combines income drawdown, cash and a later life annuity to cater for its members in the new post-pension freedom landscape.

The strategy, according to chief investment officer Mark Fawcett, is intended to engage and stimulate innovation and product development within the pensions and investment industry, to meet the needs of Nest’s members.

The report was also a response to Nest’s consultation on investing for its members in relation to the newly implemented reforms affecting those in a defined contribution pension scheme.

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The consultation found that in the opinion of Nest members, the top three pension products all offered an inflation-protected income, a guaranteed income for life and carrying minimal market risk.

The study stated: “To a certain extent this is a counterintuitive finding for pension providers, as a product fitting this description has been in existence for a long time in the form of an index-linked lifetime annuity.”

The survey not only highlighted an interest in lifelong income, but also revealed an appetite for ad-hoc cash lump sums, and the ability to pass on savings to beneficiaries – particularly in the event of early death.

According to the Nest report: “Features to meet some of these desires have been and are being added to traditional annuity products. However, there is still a general perception that an immediate annuity bought at the start of retirement does not tick enough of consumers’ boxes for it to continue to be the main vehicle for delivering retirement income. Savers perceive them as poor value, inflexible and unfair to those who die early.”

The retirement income blueprint explores three products to cover three phases of later life.

Phase one is applicable to Nest members typically from their mid-to-late 60s to their mid-70s.

It proposes investing around 90 per cent of members’ pension pots into an income drawdown fund which is aimed at delivering a steady income for 20 years, increasing annually to help keep pace with inflation.

As well as paying a monthly income, it has also been suggested that between 1.5 per cent and 2 per cent of the pot would be injected into a separate later-life protected income fund which would be refundable up until age 85.

The other 10 per cent would be allocated to a cash fund, from which savers could take out cash lump sums when they saw fit. Nest said that it would expect cash withdrawn from this fund to be transferred directly into the member’s bank account.

“We believe that describing this as later-life protected income captures the essence of what is intended, managing longevity risk without the familiar jargon,” it said, adding: “Crucially, prior to 75, these allocations are still liquid and can be returned to the member’s estate or his nominated beneficiary.”

In the event that the income drawdown fund outperformed, something Nest considers to be a highly probable event, a “prudent” level of the surplus would be distributed into the cash fund. Members would be free to decide to purchase extra income, keep it saved or spend it straight away.