Consumers with high levels of credit card debt or saving for a deposit on a house might want to opt-out of saving into the proposed personal accounts, suggests Minister for Pensions Reform James Purnell.
Speaking as the special guest of a roundtable with six financial intermediaries - hosted by IFAonline - Purnell suggested the government had opted for auto-enrolment, when personal accounts are introduced, over compulsion because there were groups of people who would be better off saving for other purposes or paying off credit card debt before saving for retirement.
“We thought that there were some groups who at particular points in their lives would have legitimate reasons for not wanting to save,” says Purnell.
“People paying off very high burdens of credit card debt, for example, might be better advised to pay that off first before starting to save, people who are going to be persistently on low incomes are actually going to get quite a good replacement rate from the State anyhow should use it for consumption today rather than to top up their pension in situations, where they will probably be getting as much from the State pension as if they were to pay into a personal account while working.”
Further into the conversation, he also suggests based on the consultation it held with the general public, automatic enrolment is likely to increase participation in the into personal accounts scheme except where there is a short-term need to opt-out and save for other purposes, such as saving to buy a first home.
“Automatic enrolment is pretty good at increasing the participation rate,” says Purnell.
“Our estimate is 50-70% of people will stay in [the scheme]. If they decided not to stay in the first time we would then re-enrol them on a regular basis so even if they decided for good reasons - such as saving for a deposit now and therefore don’t want to save for this period - we would then come back and enrol them repeatedly throughout their career,” adds Purnell.
However, Nick Bamford, managing director of Informed Choice and one of the six financial advisers invited to discuss personal accounts with Purnell, says he is concern many more people will opt out of personal accounts than the government anticipates.
“The fear is many people will simply choose to opt out of personal accounts,” says Bamford.
“We have already seen some research suggesting half of the people this is targeted at will simply vote with their feet and will be like a massive revolving door – they will be automatically enrolled and as soon as they see the impact upon their net earnings they will vote to come out of it. I’m uncomfortable with an automatic enrolment system which has the absence of compulsion. What will encourage them to stay in there?” continues Bamford.
Other members of the panel are particularly concerned the lack of financial provision for financial advice within the establishment of personal accounts.
To counter concerns about lack of financial advice for employees, Roger Sanders, deputy chairman of Helm Godfrey, suggests the government should provide some flexibility in allowing employers and employees to factor in the cost of advice, with the consent of both the employer and employee.
“Even if you offer a decent [company pension scheme] as an employer, 25% of those who are offered the chance don’t bother to join without an additional component of advice whether it be generic or focused and in terms of linking the pension provision with what they have already,” says Sanders.
“I believe there should be the ability - with employer and employee consent – to factor the cost of that advice into the additional cost borne by those accounts so. If we end up with a base fund management of 35 basis points or 40 basis points, there should be a facility for an additional charge to pay for the advice with the consent of all concerned in that particular place of work,” he adds.
Purnell says issues concerning the provision of generic advice, for example, will be tackled in the DWP’s next White Paper and will be “white on personal accounts and green on some of the subsequent issues like advice”.
Other panellists of the special roundtable focused on personal accounts are Michael Inkley, director at Sanderson Law Pensions Management, Ian Smith, managing director of Central Financial Planning, John Donaldson, IFA Partner at Positive Solutions and Tom McPhail, head of pensions research at Hargreaves Lansdown.
You can read more of the thoughts and comments from our roundtable of six financial advisers with James Purnell MP, by clicking on the main discussion as well as key priorities the six advisers believe the government should tackle.IFAonline
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