Transfers will not be allowed between existing schemes and personal accounts to help reduce the impact on existing employer pension provision, although this will be reviewed in 2020.
In the pensions white paper: ‘Personal Accounts: a new way to save’ the government outlines ways it intends to help avoid the potential problem of existing schemes “levelling down” to the contribution level of personal accounts.
It says it has decided to prohibit transfers from existing schemes into personal accounts to avoid market disturbance and remove the need for employers and individuals to make “complex and possibly costly decisions” about pension transfers.
However, although it says there is a good case for initially prohibiting transfers, it suggests this policy should be kept under review, with the Personal Accounts Board scheduled to review the existing arrangements in 2020 to see whether the prohibition “remains appropriate”.
The paper also reveals other measures to be taken by the government include introducing an exemption process for employer-sponsored schemes, removing the employer designation requirement from stakeholder pensions and introducing annual contribution limits of at least £5,000.
But although this is higher than the £3,000 limit suggested by Lord Turner in his second Pensions Commission report, the government is also suggesting the contribution limit should be £10,000 in the first year of operation to “support saving between now and 2012”.
It suggests this would encourage saving, as it would allow individuals who had built up savings in a non-pension savings vehicle, to transfer up to £10,000 into the new personal accounts system.
And the paper argues the increased limits are justified, as the Pensions Commission suggested a replacement rate of 67% from their pension fund would be representative of many people’s “aspirations of retirement”.
However, it says research carried out by the government suggests to achieve this from a Defined Contribution (DC) system such as personal accounts, people would need to contribute on average £5,000 per year.
The paper therefore claims the £3,000 limit proposed by Turner would “overly restrict the potential for voluntary saving”, adding “while we wish to maintain the focus of personal accounts on moderate to low earners, it is also important to allow sufficient flexibility for those individuals who wish to save more”.
However, the paper states the government is proposing that the Personal Accounts Board, which will replace the Delivery Authority once the system is up and running, will have the ability to review these limits to make sure they balance the objectives of focusing the scheme on the target market, but allow enough flexibility for individuals to save for their retirement.
Meanwhile, the white paper also reveals the government still believes there is a role for the stakeholder pension in the future, and says it sees no case for “withdrawing stakeholder pensions and reducing the choice available in the pensions market”.
The government instead says it sees stakeholder as a “suitable option” for people who might want to supplement their other pension arrangements, although it admits with the introduction of personal accounts, some requirements surrounding stakeholder are no longer necessary.
As a result, the paper has announced the government will remove the employer designation requirements, where any employer with more than five employees must designate a stakeholder scheme and consult employees about the choice, once personal accounts are introduced in 2012.
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Nyree Stewart on 020 7968 4558 or email [email protected]IFAonline
Working with fintech InvestCloud
Subject to unitholder approval
Partner Insight: Introducing the Architas education series for clients.
'Fewer than 1% of firms PROD-compliant' - Rory Percival
'Left holding the can'