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Topics: blog| Fees| AMC| NEST| auto-enrolment
Mark Fawcett, chief investment officer at NEST, explains how the savings vehicle’s charging structure works.
Even with auto-enrolment just over a year away, NEST continues to have to bust myths about what it is.
This is understandable, but for advisers one subject that needs particular attention is how NEST charges its members.
NEST charges 0.3% annually on members' total funds under management, plus a charge on contributions of 1.8% as contributions are made.
Over a saving lifetime, our charges work out as broadly equivalent to 0.5% annual management charge (AMC). So how does 1.8 plus 0.3 equal 0.5%?
To keep things simple, let's assume that someone is contributing around £1,000 to their pot each year and by the tenth their pot stands at £10,000.
In that year, the saver will pay a contribution charge of £18 and an AMC of £30 or 0.3%. So, this £30 in annual management charge plus £18 contribution charge is £48, which is broadly equivalent to 0.5 per cent AMC.
NEST will extend low charges to millions of people across the UK who currently have no access to pension saving and it will be a low-charge scheme from the outset.
Charges have a significant impact on a member's pot.
The recent WRIC report gave an example of the impact on charges for someone with average earnings of £21,024, using assumptions of investment growth at 3.5% a year, earnings growth at 2% and 40 years of saving at an 8% contribution rate.
Paying charges at 1.5% gave the hypothetical saver a pension pot of £144,507.
However, take the charges down to 0.5% and the same person gets a £178,842 pot, which is 19% greater than in the 1.5% scenario.
We have designed NEST to be a low cost and high quality scheme, with robust governance and what we believe is a forward-looking approach to risk management when it comes to members' money.
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miscalculation
Sorry, schoolboy error, the actual reduction on the above basis is 2.05%
Posted by: musketeer
Small progress
Why does everyone quote 1.5%? Are we assuming they were advised on their pension by a bank saleman then? When using passive or lesser managed default funds the AMC on a Personal Pension is often as low as 0.6%. The level of management and fund choice available for 1.5% can't be compared to NEST. If it survives 10 years then it may still be worthwhile. However, if it fails like most government pension initiatives no-one will be getting their 1.8% back will they?
Posted by: MarkG
Whose NEST is this feathering?
You're dead right, musketeer. Did this guy used to advise Gordon Brown on his economic calculations? £1kpa for 10 years with 1.8% contrib charge does not give you a pot of £10k in year 10. Mind you, when you work the figures out, over 10 years it is comparable with an AMC of about 0.6%. The big question is, though, will the funds available produce the return you could get by investing with a proper pension provider? It's all very well NEST concentrating on low risk funds for low earners, but they will need to see the returns otherwise people will just opt out. Consequently, will they be able to run the thing if too few people invest?
Posted by: Dermot
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Confused - you will be
Interesting calculation.If this hypothetical character is investing £1000/year and losing £18 of that in contribution charge, he will be investing £982. Presumably the AMC of 0.3% will be applied to that resulting in a deduction of £2.95. So if he has no growth his £1000 will have reduced to £979.05, equivalent to an annual charge of 0.98%. No matter how many years he does this for, if there is no growth or loss the calculation will be the same every year, or am I missing something?
Posted by: musketeer