The Pensions Bill issued at the start of December is the eighth in the last twelve years. Add in the numerous Finance Acts which also introduce changes to pensions, and it is clear that retirement saving in the UK is not being given the long-term view which is necessary.
However, it is important not to ignore this Bill as it introduces very significant changes to the UK savings market. From 2012 all employers will have to automatically enrol most of their staff into either a personal account or an alternative good quality scheme - doing nothing will not be an option. This is a sea-change from the current voluntary approach to pensions, forcing employers to pay 3% of band earnings for all staff that don't opt out.
One condition included in the Bill will make it almost impossible for good existing schemes to exempt employers from offering personal accounts. To be 'qualifying' the employer has to contribute at least 3% of qualifying earnings and the total contribution has to be at least 8%.
The definition of qualifying earnings is the band of earnings between £5,035 and £33,540 and includes additional benefits such as overtime, bonuses and commission.
Most existing company pension schemes use full earnings (rather than earnings over £5,035) and basic pay only. This means the scheme must work out whether 8% of basic pay is greater than or equal to 8% of total pay between £5,035 and £33,540. This may well change month to month for each employee depending on the amount of overtime worked or commission paid.
This level of bureaucracy means there is a high likelihood that existing schemes will be closed in favour of personal accounts. It is essential this changes to allow schemes paying 8% of total basic pay to be compliant.
The amount which can be paid to personal accounts is another area which differs from the Government's previous position. The Government decided to have a cap on contributions of £3,600 although this is indexed from 2005, meaning that it is likely to be around £5,000 by 2012. There may be a higher limit in the first year of personal accounts of £10,000 which will allow people to roll some other savings into personal accounts when they come into existence.
In the Bill the Government has decided to allow lump sums to be paid in addition to this indexed contribution cap of £3,600. In other words the cap will only apply to regular payments with unlimited one-off payments being allowed at any time.
Transfers from other pension arrangements will not be allowed until at least 2017 so these lump sums will need to be paid from other savings or income.
As there is no advice in personal accounts, and the Government is relying on apathy to build savings, it seems unclear who will encourage or help individuals who want to pay additional amounts. In addition it is unlikely that significant numbers of the target market for personal accounts will want to save more than £3,600 a year. However, it may mean personal accounts will stray even further into the territory of existing pensions, both group and individual.
As pensions legislation changes so frequently, some potential changes can be overlooked or dismissed. The measures in this Bill are crucial to the future of retirement saving in this country and employers will need help and assistance over the next few years in working out how best to cope with the introduction of personal accounts.
First we all need to lobby the Government to ensure personal accounts do not unnecessarily affect good quality existing schemes. Or we run the risk of leaving millions of people worse off in retirement than they otherwise would have been.
EIS and Seed EIS sectors
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Avoidance, evasion and non-compliance
From 6 April 2019