People aged between 22 and the State Pension Age will be automatically enrolled into personal accounts when they are introduced in 2012, if they are earning above £5,000.
Details released today in the pensions white paper: ‘Personal Accounts: a new way to save’, reveal people will be automatically-enrolled if they earn between £5,000 and £33,500 a year, although when the system is first introduced the earning bands will be based on the relevant Primary Threshold and Upper Earnings Limit for National Insurance contributions.
In addition the paper says people outside the stated age range will be able to join the scheme voluntarily, and receive the compulsory employer contributions where eligible, while the band of earnings where on which contributions are payable will be uprated in line with earnings to “ensure the scheme is sustainable”.
However the white paper is asking consultation questions, and as there has been some representations suggesting it would not make sense for people nearing state retirement age to be auto-enrolled into the new system, it is asking for feedback on whether there shoudl be a lower maximum age limit for entrants to the scheme.
The system will see employees contributing 4% of their earnings, which will be phased in over three years, together with 3% from their employer and 1% tax relief from the State, however the paper admits this will only achieve a minimum level of income in retirement, (at a replacement rate of around 45%), and says the personal accounts board will be “given a duty to encourage saving above the minimum level of contributions”.
In addition once a person is a member of the personal accounts system, when they move jobs, if the employer doesn't provide access to an existing exempt scheme, then the individual can be "fast-tracked" back into the personal accounts system, and restart contributions, before the expiry of a new opt-out period.
The paper also confirms employees will be automatically re-enrolled into the scheme every three years, while the paper has been unable to suggest a level of contributions for the self-employed, and instead states: "self-employed people will be able to save in personal accounts at a level of their choosing", subject to the contribution limits.
Meanwhile on the issue of means-testing the paper argues the state pension reforms announced in the Pensions Bill two weeks ago, mean there will only be a small group of people, less than 10% of pensioner households in 2050, who will not benefit form saving in personal accounts because of means-testing.
And it argues the proposed reforms combined with the employer contributions mean “very few people will see little or no benefit from saving”, while “the majority will see significant returns”.
But it does admit some people will rightly decide not to save for a pension, and these could include those on “persistent very low incomes or those struggling with high unsecured debt.”
As a result it points out that “ultimately, it should be for the individual to decide whether and how much to save based on their particular circumstances”.
Meanwhile the paper also announces there will be no waiting period for employers before employees are auto-enrolled and warns employers will be subject to a “light touch” compliance regime to make sure they conform to the new system.
The government expects this to be based on the model used fro enforcing the national Minimum Wage which combines the right of employees to take a case to an employment tribunal, along with whistle-blowing and risk-based investigations.
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
The increase in minimum AE contributions has had little impact on opt-out rates - with cessations after April increasing by less than two percentage points, data from The Pensions Regulator (TPR) shows.
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