Nail flange (new construction) is better 99.9% of the time. Its not unusual to find retro windows glued on to the existing window frame with 2 screws and double sided tape. And a 3 to 6 inch border trim of vinyl around the window is real tacky. I think in my area most of the retro installers hide their own easter eggs.
I agree that what you are is the incorrect way to install a window, but you are referring to a complete tear out or slide in the old frame. Again I agree that a complete tear out is the proper way to replace a window. The only time a window may be needed to be installed in the old frame is if the trim line becomes a major issue for the homeowner. Sometimes they love their old trim so much that it's impossible to make a new window fit up to it. In general with old wood frame single pane windows it's impossible to have both the exterior fit tight and the interior match perfectly. All this is dependent on the how old the windows are that are being ripped out. Exterior finish is a factor as well. Tell me how to use a nailing fin on brick exterior in a replacement application.