Pension Reforms: Personal Accounts
In December 2006, the Government published a White Paper, outlining its proposals for Personal Accounts. The proposals are intended to introduce a straightforward opportunity for employees to contribute to a high-quality, low-cost savings vehicle. This should increase retirement savings throughout the UK and reduce the reliance on the State.
The scheme, which will be introduced in 2012, is likely to have the following key features.
Governance
Personal Accounts will be a trust-based defined contribution (i.e. money purchase) occupational pension scheme. It will be regulated in much the same way as existing trust-based defined contribution schemes.
Minimum Charges
Through personal accounts the Government aims to provide people with a simple low-cost way of pension saving. The charge structure and level of charges that will apply to members in the personal accounts scheme is yet to be decided. The Personal Accounts Delivery Authority published a summary of responses to their consultation on charges structure for personal accounts on 15 July, and will make recommendations on the structure and level of charges as part of its wider advice to Government on the delivery of personal accounts. The Government fully intend that the scheme will be the type of low cost scheme envisaged by the Pensions Commission.
Investment Choice
There is likely to be a choice of investment funds, which may include options such as social, environmental and ethical investments, as well as branded funds.
For those not wishing to make an investment choice, there will be a default fund. Members will be automatically enrolled into the default fund if they do not choose an investment.
Membership
It is proposed that:
- Employees between 22 years of age and State Pension Age will be automatically enrolled if they earn more than around £5,000 per annum;
- Employees will pay contributions of 4% on their earnings between around £5,000 and £33,500 per annum;
- Employers will pay contributions of 3% on the employees’ earnings between around £5,000 and £33,500 per annum;
- An additional contribution of 1% will be paid by the Government as tax relief;
- The band of earnings will rise each year in line with earnings; and
- Employees under 22 years of age and above State Pension Age will be able to opt into the scheme, with access to employer contributions if they earn between the earnings bands.
Employees that have access to their employers’ own pension schemes may be exempt from being automatically enrolled into the Personal Accounts. Exemptions will be for members of defined benefit (i.e. final salary) schemes that meet the reference test and for members of defined contribution schemes that have a minimum level of employer contributions.
The self-employed will be able to opt into the personal accounts scheme.
Employers
There will be support for all employers during the introduction of compulsory employer contributions:
- Their contributions will be phased in (probably over a three-year period, at the rate of 1 per cent each year) so that the burden on employers is minimised; and
- The contribution rate will be set out in primary legislation to create stability.
Opting Out
Employees will be automatically enrolled (unless exempt) into the Personal Accounts. They will be able to opt-out of the Personal Accounts.
Transfers
There will be a general prohibition on transfers to and from the personal accounts scheme. This will be reviewed in 2017.
Contribution Limits
There will be an annual contribution limit of £3,600 (in 2005 earnings terms). This will be uprated by earnings year on year.
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