Behind the headlines: Nest trial ‘sidecar’ savings plan
With growing concerns surrounding the illiquidity of pensions and the difficult savings climate, it’s no wonder that Nest are introducing a radical early access savings vehicle in addition to a pensions offering to support those who would otherwise struggle to save towards their future (source 1).
Pensions Expert reports that the plan “would allow people to split pension contributions between a standard Nest pension pot, and an external bank account or liquid fund for emergency spending”. The publication continues that “once the level of emergency savings reaches a satisfactory threshold, all contributions would likely be diverted to the pension pot”.
If the saver then withdraws funds and goes below the threshold, future contributions will divide again between the two accounts until the cap is re-reached. For this reason it’s been referred to as the sidecar model.
Head of Nest Insight, Matthew Blakstad, commented that “lots of people are savers, but have no emergency fund,” explaining that auto-enrolment contributions might leave them unprepared for short-term financial shocks, such as unemployment and damage to property (source 1).
Currently, all auto-enrolment contributions must go into a pension and so a trial is therefore required to see if this new plan could be run in parallel with the current auto-enrolment process (source 1).
Nest Insight’s Executive Director, Will Sandbrook, predicts that five to six at least medium sized employers will need to be involved in the trial, but that the take up by the staff will be voluntary (source 2).
But will it work?
Success is all down to saver behaviour. Limiting access would prevent savers using the ‘rainy day’ fund for non-emergencies, but could make the product less useful in actual emergencies (source 1).
For Sir Steve Webb, former pension minister and director of policy at Royal London, behavioural risks are too high for success: “I’m not convinced that people will make the connection between a sudden need for cash and their pension”. He feels that people could be likely to borrow from the emergency fund and never put monies back, due to the little attention paid to pension arrangements in today’s society (source 1).
And more importantly how would it work?
Any employer or payroll agent approached by Nest to participate in the trial will need to consider the administration involved in running a separate net pay deduction for the savings element of the plan, almost certainly in a separate upload file so that it can be kept distinct from the pension contribution as until it ‘overflows’ into the pension fund it cannot attract tax relief. The employee will therefore need to understand that the overflow amount would be paid in gross, as the employers cannot reduce the ‘sidecar savings’ by the standard 20% that is applied to all relief at source pension contributions.
Agents may well need to consider additional charges for running such a scheme and employers could of course agree an admin fee for offering the savings vehicle as long as this did not reduce hourly pay below national minimum wage, as even if the employee agreed to the deduction, the admin fee would be for the benefit of the employer and therefore prohibited.
Source 1: http://www.pensions-expert.com/DC-Auto-enrolment/Nest-unveils-sidecar-savings-trial-plans?ct=true
Source 2: https://www.ftadviser.com/pensions/2018/02/16/nest-seeks-3k-savers-to-test-early-access-pension/