Personal accounts - a new kind of pension
February 25, 2008
How important do you think having a pension is? Given the total value of a company pension scheme to an employee in comparison to other benefits, a surprising number of people (particularly young people) just don’t see how good a benefit it is and choose to opt out of a scheme when there is one available. In my previous position the organisation I worked for provided a local government pension – and despite the employer contribution being a whopping 12% and the fact that it was a final salary scheme, many people decided to opt out of the scheme as they wanted the money for now. There are also many companies that still don’t provide an employer contribution-based pension scheme, even though it can be a fantastic recruitment and retention tool. The problem is that a lack of communication and understanding of the exact benefits means that a lot of people don’t see a company pension as a positive thing – and the feeling that you’ll never actually grow old contributes further to the ‘live for now’ attitude.
The Government estimates that there are 7 million people who may not be saving enough to give them an adequate income in retirement, and therefore submitted a White Paper in December 2006 called “Personal Accounts: a new way to save”. This proposed a new system which will automatically enrol employees over the age of 22 and earning at least £5000 a year into a personal pension account, unless they are already part of a company pension scheme that has more favourable benefits. Employees will be able to opt out if they do not wish to save for a pension, but it is hoped that the automatic enrolment will strongly encourage people to plan for their retirement, particularly those that come within the “target group”: employees on moderate to low incomes, younger people and women (who are a significant majority of those with lower earnings).
Under the new scheme, which will come into force in 2012, employees will be obliged to pay in a minimum of 4% of their salary, and employers will pay 3%, with an additional 1% being given in tax relief. This is probably a welcome development for employees who are not currently provided with a company pension scheme, although some critics are worried that employers currently providing better terms than this will reduce their contributions to the statutory level. I think this is unlikely as many employers will want to retain their pension scheme as an attractive benefit and the only way to do this is to provide more favourable arrangements that exceed their statutory requirements. What the proposed scheme will hopefully do is highlight the need for individuals to make provisions for their retirement and help everyone to understand their options.
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