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BeeHive  >  BeeLines  >  2008  >  Jul  >  Personal Account Sales Aid

Personal Account Sales Aid

A glimpse of the future here for you; a future in which millions of people will be heading for something called ‘Trivial Commutation’ in our present-day tax laws if I’m any judge.

Patricia Hollis, who you may remember was a guest recently on our famous Pensions Radio podcast, asked a deceptively simple question in the House of Lords a little while ago.  The idea of the question was to find out what the effect of ten years; twenty years; thirty years; and forty years of persistent saving in Personal Accounts would have on the probable retirement incomes of those in the target market for auto-enrolment into that soon-to-be-launched scheme.

The answer to the question(s) came in the form of a table that Ms Bruun found for me in Hansard and I reproduce here for you to see too.  To understand the table I guess you’ll need to know some of the jargon.  The term ‘replacement rate’ is used and refers to the percentage of a person’s earnings that will be ‘replaced’ in retirement through a combination (in this case) of the Basic State Pension (BSP), the State Second Pension (S2P) and the pension derived from persistent saving in Personal Accounts.

As an example to help you ‘read’ the table, my understanding is that someone earning £10,000 a year in today’s terms would end up with a total pension of £9,200 a year (a 92% replacement rate) if they have a full entitlement to BSP and S2P and forty years of persistent saving in Personal Accounts.  Without the Personal Accounts pension the replacement rate (from just the BSP and S2P) would be 84%, or to put it another way the annual pension would be £8,400.  So the additional pension for forty years of saving would amount to £800 a year, or around £15 a week.  For a £10,000 a year person saving for just twenty years the replacement rate with full BSP, thirty years of S2P and 20 years of Personal Account membership is shown in the table as having a replacement rate of 78% (equating to an annual pension of £7,800) whereas the same person who opts out of Personal Account saving and relies solely on the BSP and S2P entitlements would have a replacement rate of 77% (equating to an annual pension of £7,700).  The twenty years of persistent saving into the Personal Account would apparently have the effect of producing an annual income of around £100, or a little under £2 a week.

These figures, of course, show the value of the Basic State Pension and the State Second Pension reforms to people on modest incomes as being far more valuable maybe than the act of making additional savings and do, I think, put much of what is happening in this current Pensions Bill into perspective.

Here’s the relevant extract from Hansard with both the question in full and the table that was produced in answer to it (you should note, however, that the examples assume the person involved is a man who starts work aged 22 in 2012 and that the outcomes for people already at work and accruing less generous state pensions under the existing scheme and transitional arrangements would, of course, be different – people in that position (the vast majority of those likely to be auto-enrolled in 2012) could also, again of course, find that some of their means-tested entitlements would be withdrawn due to their having saved in a pension):


Baroness Hollis of Heigham

What percentage of earnings would retirement income represent at (1) £10,000 per annum; (2) £15,000 per annum; (3) £20,000 per annum; and (4) £25,000 per annum, on the assumption that the individual retires with (a) a full basic state pension (BSP) plus a full state second pension (S2P) plus 40 years of a personal account (PA); (b) a full BSP plus a full S2P plus 30 years of PA; (c) a full BSP plus 30 years of S2P plus 20 years of PA; (d) a full BSP plus 20 years of S2P plus 10 years of PA; and what would be the percentage for (a), (b), (c) and (d) if the individual opted out of auto-enrolment.


Lord McKenzie of Luton

The figures requested are in the following table. These are based on a range of factors, including those around investment returns and other factors.

Rates in the table are rounded to the nearest whole number.

Annual Earnings

(a) Full BSP and full S2P, 40 years of pension saving

(b) Full BSP and full S2P, 30 years of pension saving

(c) Full BSP and 30 years S2P, 20 years pension saving

(d) Full BSP and 20 years S2P, 10 years of pension saving


Final net weekly income with saving (£)





Replacement rate with saving (%)





Improvement in replacement rate from saving (%)






Final net weekly income with saving (£)





Replacement rate with saving (%)





Improvement in replacement rate from saving (%)






Final net weekly income with saving (£)





Replacement rate with saving (%)





Improvement in replacement rate from saving (%)






Final net weekly income with saving (£)





Replacement rate with saving (%)





Improvement in replacement rate from saving (%)





Note: In all cases, the results are based on a male who starts work aged 22 in 2012, with savings at the default level, phased in over a three-year period. The figures may therefore represent only a few years of saving at the 4 per cent individual contribution level. For example (d), this means that the hypothetical individual will have saved at the full level only for eight years. Those with small pension savings, resulting from few years of saving, would be able to trivially commute their pension pot.

HL Deb 03 July 2008 ccWA52-WA53

Steve Bee

8 July 2008

Source: Lords Hansard debate 30 July 2008

Any research and analysis has been provided by us for our own purposes and the results of it are being made available only incidentally.

Parliamentary material is reproduced with the permission of the Controller of HMSO on behalf of Parliament.