Auto Enrolment Advice For Employees

Auto-Enrolment and Personal Accounts: Advice for Employees

Q & As

What are Personal Accounts?

In a move to encourage saving for retirement, the Government is introducing a new low-cost saving scheme – currently called Personal Accounts but this name may change. It is to be introduced from 2012 and employers who do not offer access to a suitable alternative pension arrangement will be able to use personal accounts for their employees.

Employees will be automatically enrolled in the scheme but will have the opportunity to say they do not want to join. They will also be able to come out again at a later date if they want to.

Contributions will be paid by employees and employers and invested in a range of funds. At retirement, the accumulated fund will usually be used to provide an income for the member’s lifetime.

Members of the scheme and their employers will be able to pay additional contributions above the specified levels. However, there will be an overall limit on the total amount that can be invested in the scheme each year. At present this limit has been set at Ł3600 pa.

The scheme will be run by a board of trustees. The trustees will run the scheme independent of Government and the scheme will be regulated by The Pensions Regulator in common with all other occupational pension schemes.

What is auto-enrolment?

This is a process whereby employees are automatically entered into a pension scheme without any form of application on their part. Many employees fail to join valuable pension schemes where they first have to initiate an application process. Auto-enrolment is meant to overcome this obstacle.

When the pension reforms are introduced in 2012, all eligible employees will have to be auto-enrolled into a qualifying pension scheme. Employers will be able to choose which qualifying scheme to use, including the new personal accounts scheme. All qualifying schemes must meet minimum standards, either of the benefits it provides or the amount of contributions paid to it, and must also provide auto-enrolment for all eligible employees who have not already joined the arrangement and for all new employees when they become eligible.

Will I be auto-enrolled into Personal Accounts in 2012?

If you are an eligible employee, i.e. you are between 22 years of age and State Pension Age and earn more than the specified minimum level (around Ł5,000pa) you must be automatically enrolled in Personal Accounts, unless:

you are a member of an employer’s final salary pension scheme that meets certain minimum standards, or
you are a member of your employer’s money purchase pension scheme that is receiving a minimum level of employer contributions, or
you are a member of a personal pension plan or stakeholder pension scheme that is receiving a minimum level of employer contributions.

If you are not an existing member of one the schemes mentioned above, you must be either auto-enrolled in Personal Accounts or in your employer’s pension arrangement provided that arrangement meets certain minimum conditions as to the benefits it pays or the level of contributions paid to it.

I already pay into my employer’s final salary scheme. Should I continue?

Your employer’s final salary scheme provides you with a valuable retirement benefit. As you will be aware, the income available at retirement is based on your pensionable earnings and length of service on leaving.

Retirement benefits available from Personal Accounts are unlikely to be as valuable as those from your final salary scheme. This is because they are based on the fund available through payment and investment of contributions. This comes with a degree of volatility in the benefits you will get that a final salary scheme does not have. Also, the limit on contributions to Personal Accounts (currently set at Ł3600pa) means you are unlikely to be able to build up a fund large enough to complete with final salary benefits accrued over an equivalent period of time.

So, whilst your employer continues to operate the final salary scheme, it may not be in your best interests to cease contributing.

Also, once you choose to leave, the rules of your scheme may prevent you from rejoining that scheme at a later date. If you did leave now, you cannot be entered into Personal Accounts until 2012. Careful consideration should therefore be given before choosing to leave because you may be sacrificing any future pension rights through your employment.

I already pay into my employer’s money purchase scheme. Should I continue?

Your employer’s money purchase scheme operates in a similar way to Personal Accounts – retirement benefits are based on the fund available from the investment of the employer and employee contributions.

Your employer may decide to keep your money purchase scheme going after 2012 or close it in favour of Personal Accounts. Either way, continuing to save for retirement before 2012 is still important. Ultimately, the more you save, the more you can expect to receive at retirement.

Whatever happens, withdrawing from the scheme now will reduce your retirement saving. It may also deny you valuable contributions from your employer (assuming they contribute) – effectively giving up additional pay.

I already pay into my employer’s stakeholder scheme. Should I continue?

Your employer’s stakeholder scheme operates in a similar way to Personal Accounts – retirement benefits are based on the fund available from the investment of the employer and employee contributions.

Your employer may decide to keep your stakeholder scheme going after 2012 or close it in favour of Personal Accounts. Either way, continuing to save for retirement before 2012 is still important. Ultimately, the more you save, the more you can expect to receive at retirement.

I already pay into my employer’s GPP. Should I continue?

Your employer’s GPP operates in a similar way to Personal Accounts – retirement benefits are based on the fund available from the investment of the employer and employee contributions.

Your employer may decide to keep your GPP going after 2012 or close it in favour of Personal Accounts. Either way, continuing to save for retirement before 2012 is still important. Ultimately, the more you save, the more you can expect to receive at retirement.

I don’t have a pension with my employer so it’s likely I’ll be auto-enrolled into Personal Accounts in 2012. Should I save for retirement in the meantime?

Saving for retirement is very important, whether in a pension or another type of investment. The more you save and the longer you save, generally the more you will have to live on in retirement. The longer you leave it to start saving for your retirement, the more it will eventually cost you if you want to retire with a decent pension. Alternatively, putting off starting to save may mean that you will end up having to put off when you will be able to afford to retire.

There are a couple of options for saving in a pension plan. They are personal pension plans and stakeholder pension schemes. They work in the same way – your contributions are invested and the fund available at retirement is used to provide you with an income.

Of the two, stakeholder pension schemes provide increased flexibility. You can start, stop, increase and decrease your contributions without penalty. Personal pension plans do not always provide this flexibility. There is also a cap on your annual charge administration charge – 1.5% per annum of the value of your fund for each of the first ten years and then 1% per annum thereafter.

If you do decide to start contributing to a plan now, you can continue contributing after 2012, even if your employer enrols you into Personal Accounts. You could therefore be contributing to two (or more) plans at the same time.

You should be aware that if you decide you cannot afford to pay into both Personal Accounts and your own plan, it would make sense to stop paying to your own. Being in Personal Accounts will involve a payment from your employer and Personal Accounts are likely to have lower charges, making it better value for money.

However, this factor may influence your choice as to what kind of plan you should use for the next few years. If you stop contributing to a stakeholder plan, the rules will only allow the normal annual charges to be deducted. No such rules apply to personal pension plans and you need to check if any additional charges will be made if you stop contributing. There are personal pension plans where the charges which are levied if you stop contributing can result in a large part of your savings disappearing. You need to ask what would happen if you stop contributions.

I have previously chosen not to join my employer’s final salary scheme? Should I join it now?

Firstly, you need to check that you can join your employer’s final salary scheme. Some schemes have rules preventing employees from joining when they have previously refused an offer to join or have opted-out.

Retirement benefits available from Personal Accounts are unlikely to be as valuable as those from your final salary scheme. This is because they are based on the fund available through payment and investment of contributions. This comes with a degree of volatility that a final salary scheme does not have. Also, the limit on contributions to Personal Accounts (currently set at Ł3600pa) means you are unlikely to be able to build up a fund large enough to complete with final salary benefits accrued over an equivalent period of time.

So, whilst your employer continues to operate the final salary scheme, it may not be in your best interests to continue to be opted out.

Come 2012, your employer, faced with the prospect of auto-enrolling a large number of employees into the more expensive final salary scheme, may decide to close the scheme to all new entrants and automatically enrol you in a cheaper alternative. So it may be sensible to join now if the facility still exists as there is no guarantee that the right to join will continue to exist in the future when you might want to avail of it.

I have previously chosen not to join my employer’s money purchase scheme? Should I join it now?

Firstly, you need to check that you can join your employer’s money purchase scheme. Some schemes have rules preventing employees from joining when they have previously refused an offer to join or have opted-out.

Your employer may decide to keep your money purchase scheme going after 2012 or close it in favour of Personal Accounts. Either way, saving for retirement before 2012 is still important. Ultimately, the more you save, the more you can expect to receive at retirement.

Whatever happens, not joining the scheme now will reduce your retirement saving. It may also deny you valuable contributions from your employer (assuming they contribute) – effectively giving up additional pay. You may also find that the ability to join may not be available at a later date if you fail to take advantage of that facility now.

I have previously chosen not to join my employer’s stakeholder scheme? Should I join it now?

Firstly, you need to check that you can join your employer’s stakeholder scheme. Some employers will not let employees to join when they have previously refused an offer to join or have opted-out.

Your employer may decide to keep your stakeholder scheme going after 2012 or close it in favour of Personal Accounts. Either way, saving for retirement before 2012 is still important. Ultimately, the more you save, the more you can expect to receive at retirement.

I have previously chosen not to join my employer’s GPP? Should I join it now?

Firstly, you need to check that you can join your employer’s GPP. Some employers will not let employees to join when they have previously refused an offer to join or have opted-out.

Your employer may decide to keep your GPP going after 2012 or close it in favour of Personal Accounts. Either way, saving for retirement before 2012 is still important. Ultimately, the more you save, the more you can expect to receive at retirement.

Where can I get more information about Personal Accounts?

You can call The Pensions Advisory Service (TPAS) on 0845 601 2923 or write to them at 11 Belgrave Road, London, SW1V 1RB or email them on enquiries@pensionsadvisoryservice.org.uk

TPAS - The Pensions Advisory Service

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