Question: If a client already has a personal pension, independent of any employer scheme, and pays 5% of income into it. Will they, possibly on affordability grounds, have to redirect some of that premium into the new personal account at the expense of their current pension plan?
Edmund Downes, Norwich Union: Yes, unless their employer makes the necessary 3% of banded earnings into their existing personal pension the employee will need to be auto-enrolled into a Qualifying scheme. They don't have to pay into this Qualifying scheme as well, as they can opt out, but then they would lose the right to an employer's contribution. They should not be encouraged to opt out - even if, paradoxically, they might be better off under their existing plan. If they don't opt out then they will end up paying two sets of contributions, so unless they reduce their payments it may well become unaffordable. As things stand the employer can't pay 3% into one plan and the employee pay 5% into another. We think that such aggregate payments should be allowable - but to date they are not.
Jamie Clark, Scottish Life: The issue with people with Personal Pensions (PPs) outwith a workplace arrangement is that from 2012, there is no compulsion for employers to contribute to 'independent' PPs. There is however a requirement for employers to pay into a 'qualifying scheme' where the employee does not opt-out. So the options for such employees may well depend on whether they want to benefit from, and perceive the value of, employer contributions. Some options may include:
1. They are auto enrolled into a 'qualifying scheme' (e.g. Personal Accounts or a GPP) by their employer, do not opt-out and:
•· pay the required rate of qualifying earnings into the qualifying scheme as well as continuing to pay the full amount into their PP
•· pay the required rate of qualifying earnings into the qualifying scheme and adjust their contributions to their PP so that their overall contribution remains the same
•· stop Personal Pension paid up and pay the required minimum of qualifying earnings to the 'qualifying scheme'
•· make the Personal Pension paid up and pay the full rate they were paying under the PP into the qualifying scheme - although if the qualifying scheme offered is Personal Accounts, there will be a cap on the total that can be paid.
2. Alternatively, the employee can opt-out of the qualifying scheme offered by their employer after they have been auto-enrolled and then:
•· separately negotiate with the employer to agree an employer contribution to their own PP equal to the amount that the employer would otherwise have to pay into a qualifying scheme and continue to pay their own contributions at the full rate
•· separately negotiate with the employer to agree an employer contribution to their own PP equal to the amount that the employer would otherwise have to pay into a qualifying scheme and adjust their own contributions so that they pay the same amount as before
•· separately negotiate an increase in salary equivalent to the contributions the employer would have otherwise paid
In reality, it could be that employees paying relatively low contributions would benefit more from any required contributions from the employer. On the other hand, perhaps individuals with Sipps that hold niche assets such as property or shares may want to continue with these together with, or completely separate from, a qualifying scheme.
Selecting the 'best' outcome may largely depend on how much bargaining power the employee has and how flexible the employer is willing to be.
PADA: The government's auto-enrolment policy is designed to make it easy for individuals to participate in pension saving, helping to overcome the inertia which prevents many people from saving currently. Employers will need to choose which scheme to enrol their employees into, which may be a personal account. Individuals will then be able to opt out if they wish to. For those individuals already saving into a pension scheme, independent of their employer, they could choose to opt-out and continue to pay a percentage of their income into their existing scheme.
However, individuals who are automatically enrolled will receive contributions from their employer and the government (via tax relief). The contributions will be phased in over a number of years and will eventually equate to 8% of a band earnings (between £5,035 and £33,540 at 2005 prices). A minimum of 3% of this will come from the employer. By opting out and continuing to pay into their personal pension, an individual may miss out on this employer contribution.
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