So you’ve started a new job and found out that your employer uses Nest as their pension provider.
They tell you that Nest is a great platform and that they will match your pension contributions.
That’s great you say, but because you are financially savvy, you want to do your own research:
Is Nest a good pension provider? What are their fees like? What is their performance like?
The National Employment Savings Trust (Nest) is a workplace pension scheme set up in the UK.
Nest charges 1.8% on all contributions, and an annual management charge (AMC) of 0.3%.
Nest has 7 funds to choose from, the best one being the Sharia fund, based on its performance.
In this post, I talk about how to think of your pension in terms of platform, account, and fund.
I explain what each of these terms mean and how your pension is invested in the stock market.
Finally, I talk about platform fees, fund performances, and the best pension fund to invest in.
1. Pension Fundamentals
Nest, pension, fund – what do each of these terms mean? It’s important to understand them:
- Platform: Nest is a platform, also called a provider, just like Halifax, Aviva, and many others.
- Account: A pension is just a type of account, just like a SIPP, ISA, or a general investing account.
- Fund: This is what your pension is invested in, such as actively managed funds or index funds.
Nest is your platform/provider that your employer decided to use for its employee pensions.
They could have used any other platform, but for financial reasons, they decided to use Nest.
It’s unlikely they chose Nest because of your best interests; more due to their best interests.
As for a pension, it’s a type of investment account; pensions are invested in the stock market.
Pensions are like a Self Invested Personal Pension (SIPP) or an Individual Saving Account (ISA).
They difference between them is that your employer can make contributions into a pension.
2. Platform: NEST
Nest (National Employer Savings Trust) is a pension scheme set up by the UK government.
It is great for small to medium sized companies (SMEs) that do not want to pay a lot in fees.
However, it is just a platform or provider like any other. Some of the common platforms are Halifax and Aviva, and some of the new ones are providers such as PensionBee and Penfold.
Can you change your provider? Absolutely, you do not have to use Nest if you do not want to.
Would you lose your employer contributions? Unfortunately yes, that is likely to be the case!
It’s unlikely that your employer will agree to pay you into another provider – I’ve tried myself.
If that is the case, should you just stick with NEST then? Absolutely, due to the contributions.
You don’t want to miss out on the employer contributions, on top of your own contributions.
Once you leave that company or become self-employed, you can always choose another platform.
3. Account: Pension
Now that you’ve established your platform, the next thing to decide is what account you want.
With a provider, you can have many account types: Pension, SIPP, ISA, or a General Account.
With Nest, you can only have one type of account: a pension. You can’t open up an ISA with Nest for example (which is good because as they don’t have index fund options; more on this below).
However, for our purposes, a pension will do just fine. There are pros and cons to a Nest pension:
Pros: Your employer pays into it on top of your payments, and you get tax benefits also.
Cons: They take a percentage per contribution and you can only access your pension from age 55.
A major benefit to Nest are the fees, which are surprisingly low compared to other platforms.
When I compared the fees to a Vanguard Index Fund, it actually turned out to be the same!
Which brings us onto the key major difference Nest and other providers: their fund options.
4. Fund: Why your Fund Choice is Crucial
If your employer’s only pension provider is Nest, then you don’t have anything else to choose.
If the only account option within your provider is a pension – there is nothing else to choose.
Therefore, the only thing you do have to choose in Nest is what fund you want to invest into.
I cannot stress how important this is: You choice of fund will determine when you can retire.
In Nest, you don’t have to worry about fees: all funds charge the exact same amount of fees.
Therefore, you have to choose the fund that will give you the best performance i.e. returns.
You have 5 main fund options: Retirement Date fund, Ethical fund, Higher Risk fund, Lower Growth fund, and Sharia fund. There are 2 other fund options for those close to retirement.
Let me tell you: none of these options are ideal because they are all actively managed funds.
I wrote a post explaining what an actively managed fund is and why an index fund is better.
Although the fees are good, the performance will be nowhere as good as a passive index fund.
However with Nest, you don’t have an option: you have to invest in one of these active funds.
The default fund that will be assigned to you is the retirement date fund – do not choose this.
As you can from the graph above, it does not give you the best returns over the long term.
So what is the best fund to invest in? Based on data, the best fund to invest in is the Sharia fund.
As you can see from the image, the Nest Sharia fund outperforms all other funds.
The reason for this is because it is invested in 100% stocks and shares, when you read the documentation.
When you look at what the other funds are invested in – a mixture of stocks, bonds, REITs, commodities, etc. – it is no wonder that the sharia fund outperforms all other Nest funds.
The Sharia fund is actually similar to how index funds are invested. The only difference is that index funds are invested in companies in all industries, as opposed to just sharia compliant ones.
Please note: you do not have to be Muslim to invest in the Sharia fund. In fact, this is probably what puts people off – they think that because they are not Muslim, they shouldn’t invest in it.
However the numbers don’t lie: the Sharia fund is by far the best fund to invest your Nest pension in.
5. Take Control of your Nest Pension
Ideally, you want a provider that offers index funds that you can invest your pension in.
It may be worth a chat with your employer to see if they could pay you into another platform.
If they say no, which is the likely scenario, I guess you have no choice but to stay with Nest.
Although you can leave Nest, I wouldn’t if it means forsaking your employer contributions.
If changing platforms means no employer contributions, then I would just stick with Nest.
In that case, all you can do is choose is the best performing fund within Nest: the Sharia fund.
This is personally the fund that I am invested in, as my workplace pension is also with Nest.
Hopefully my next employer pension provider will give me the option to invest in index funds.
If you want to find out more on index funds, check out the book: The Simple Path to Wealth.
It’s a great book about index fund investing, and how you can invest in it outside of pensions.
Do you have a Nest pension? What fund are you invested in? Share in the comments below!
If you enjoyed this post, check out a similar post on stock market investing: 3 ways of investing.
If you have any suggestions for future blog post topics, please share in the comments below!
