Adviser > News > December 2008 > Personal Accounts
Personal Accounts
Personal Accounts, together with auto-enrolment, are the government’s solution to making people save more.
Some history
Personal Accounts are designed to address the issues raised in the First Report of the Pensions Commission (often called the Turner report), which was published in 2004.
This non-political Commission found that unless changes were made there would be an increasing shortfall in pension provision due to the following factors:
- people are living longer
- the UK basic state pension is one of the lowest in Europe
- the general public believe that pensions are at best risky, at worst a rip-off
- people put off saving in their younger years
The practical upshot of this is that people need to save more to support themselves for a longer period of time when they will not be earning.
What are the proposed rules?
Personal Accounts are targeted at people with little or no existing savings, specifically those workers who are not currently in an existing pension arrangement.
Auto-enrolment
According to the original report, there are around 10 million individuals in this group, and it is proposed that all of them will be automatically enrolled into a Personal Account.
Figure 1: Government estimates of eligibility for auto enrolment (millions)
Source: DWP modelling based on Family Resources Survey 2004/5, Employer’s Pension Provision Survey 2005, and Annual Survey of Hours and Earnings 2004 and Medium-sized Enterprise Statistics 2004.
Note: Figures may not sum due rounding.
Auto-enrolment is likely to have more effect than the actual PAs themselves, because it is anticipated that once they have joined most people will be too lazy or uninformed to opt out again. The so-called inertia effect.
For those who do decide that PAs are not for them this procedure will be repeated, probably every 3 years, to give them the chance to opt in when their circumstances change.
Self-employed and unemployed individuals may choose to join a Personal Account but will not be auto-enrolled.
People will not be offered advice to make this decision but will have to decide for themselves.
Contributions
It is a requirement for employers to contribute on behalf of any employees who elect to remain in a Personal Account.
The total contribution rate will be 8% of qualifying earnings and will be phased in as follows:
| Year | Contribution | |
|---|---|---|
Employer |
1 | 1% |
| 2 | 2% | |
| 3 | 3% | |
| Employee | 1 | 1% |
| 2 | 3% | |
| 3 | 4% | |
| Tax relief | 1, 2, 3 | 1% (in year 3*) |
*Tax relief at source will be added to all employee contrbutions at basic rate. In year 3, this will amount to 1% of band earnings. |
||
The original intention was to run the scheme at an AMC of 0.3% however this would not reflect the relatively high initial costs.
The Personal Accounts Delivery Authority (PADA) consulted on a number of different possible charging structures but opinion was split between a higher AMC only charge and using a combination of AMC and a contribution charge to cover initial costs.
Benefits
The government’s own figures show that an individual earning £10,000 per annum in today’s terms could be £15 per week better off after forty years’ savings in Personal Accounts and only £2 per week. better off after 20 years’ saving. This is unlikely to be enough to live on in retirement and most people should save more if they can.
Some of the people saving in Personal Accounts will not be any better off at all. Although they may qualify for the £15 per week from their pension, this will be offset either in part or as a whole against existing means-tested benefits.
Existing provision
Personal Accounts are not intended to impact on existing pension arrangements. Where an employer already has an appropriate qualifying scheme in place employees may be auto-enrolled into that scheme.
Employers will be able to self-certify that their existing scheme is at least as good as a PA scheme if they are confident that their scheme will pass the quality test. This will require an employer contribution of at least 3% of band earnings and a total contribution of 8%.
The quality test will not have to be carried out at member level but will apply to the scheme as a whole.
Effects on planning
The decision to remain in Personal Accounts is complicated however in broad terms individuals will fall into one of three groups:
- those who should not join – likely to be on low income (and so qualify for means-tested benefits) and close to retirement
- those who would benefit from joining – likely to be basic rate taxpayers not currently saving
- those who would be better off in an alternative pension arrangement – likely to be higher rate taxpayers who can afford to make substantially higher contributions.
Existing IFA clients are likely to fall into the third category, with categories 1 and 2 being catered for by money guidance or non-advised sales.
Employers will fall into one of two groups:
- those who already have a pension arrangement for their employees
- those who have no existing provision.
Those in the first category should consider why they set the scheme up and whether they still want to provide a more attractive package than their competitors.
Those in the second will have to face up to the 3% contribution requirement and should consider whether to start making contributions now.
We will continue to provide updates on PADA consultations and related legislation via our website.
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