NEST the government funded pension provider is looking to offer a transitional drawdown product for those reaching retirement. NEST is the government’s pension provider for Auto Enrolment, the plan to ensure every employee has been automatically enroled in a works place pension scheme. It’s a gradual plan for organisations, depending on their size, to sign their employees up to a pension and make contributions on their behalf. The population is living longer and the burden on the state is ever increasing. By making people responsible savers throughout their working career, the State is hoping it may ease the burden in future years.
Currently, there are over 100 providers who offer access to some kind of drawdown product. Drawdown allows income to be taken from a pension from the age of 55 and without restriction. There is one caveat however, once it’s gone, it’s gone. Annuities, on the other hand, which have fallen out of favour since the March 2014 budget, provide a guaranteed lifetime income, although these aren’t as flexible as drawdown in terms of accessing the full fund. The tradeoff though is a steady income for life, no matter how long you live.
NEST has put together a blueprint which tried to combine the two product. The proposal is that 90% of a fund would be put into drawdown to provide a steady income but kept invested and increased with inflation. The remaining 10% would be invested in cash to provide additional access to capital.
The plan would also preserve up to 2% of the pot in a later life protected income fund. At age 75 the protected income fund would be locked in and start paying at age 85. The income would be designed to equal the income before this age and pay for the rest of your life.
On death, any income which hasn’t been drawn can be passed onto a member estate like conventional drawdown but unlike current annuities, where the plan is lost to the annuity company.
Although this sounds like a revolutionary product it’s actually just a strategy which is available to most drawdown holders today. It more about being conservative with income withdrawals and planning for the future, rather than being tempted to take excessive income now.
As NEST was only set up in 2012 those reaching retirement in the next few years won’t really need to adapt this plan due to low fund values. This is more about addressing the longer term and trying to simplify a confusing drawdown market where there are many providers, thousands of funds and no standard charging structure.