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In May 2006, the Government published its White Paper on Pensions Reform, entitled "Security in retirement: towards a new pensions system". Among the recommendations of the Pensions Commission that were accepted by the Government is the introduction, likely from 2012, of a new compulsory scheme of personal pension fund accounts.
The Department for Work and Pensions has now published a White Paper entitled "Personal accounts: a new way to save", describing in detail how this employment-based savings scheme is proposed to work and what will be expected of employers. The Government estimates that the personal accounts could have between 6 and 10 million members, all making contributions through the payroll.
Delivery of personal accounts will be by means of the National Pension Savings Scheme (NPSS), with whom all employers and employees will deal. Costs in the long term will be limited to around 0.3% of funds under management. Employees will be able to choose from a default savings scheme, with their decision-making limited to whether to remain in the scheme and how much to contribute. However, other choices will be made available, such as social, environmental and ethical investments, and branded funds. All contributions, from both employee and employer, will be paid over to a single clearing house and, from there, sent to the appropriate funds.
Personal accounts will be a defined contribution, occupational scheme, not contracted-out of the state pension scheme, and are expected to be based on the existing pension framework rather than requiring new regulations. However, no transfers will be allowed into or out of personal accounts from or to existing pension schemes, and an annual limit to contributions will be set, likely £;5,000 per year, with a higher limit, possibly £;10,000, in the first year to allow non-pension savings to be contributed.
Employees will be enrolled automatically, without any waiting period, if they are between age 22 and state pension age and have earnings at or above the defined threshold for the tax year. They will be able to opt-out if they choose. The age 22 limit reflects the age from which the adult rate of the National Minimum Wage is paid and recognises that, below that age, employees, particularly students, are more likely to move jobs frequently. However, those outside of the lower and upper age limit will be able to opt-in to the scheme. Scheme membership will not be compulsory, recognising that some may not be able to save, for example, because of paying off high levels of debt. Every three years or whenever they change jobs, employees who have opted-out will be re-enrolled in case they now wish to save, but they will be able to opt-out again if they wish.
Employee contributions will be around 4% of their earnings in the "personal accounts earnings band" (PAEB). In the first year of operation, the PAEB will start at the NICs earnings threshold for that year (i.e. £;100 per week or £;5,225 per annum in 2007/08 terms) and stop at the upper earnings limit (i.e. £;670 per week or £;34,840 per annum in 2007/08 terms). From the second year, however, the PAEB limits will be linked to the growth in annual earnings, to maintain the value of contributions. Employees will be encouraged to contribute more than the minimum 4%. A further 4% will be added by means of a 3% contribution by the employer and 1% in basic rate tax relief. Further relief may be claimed by higher-rate tax payers. The level of the employer's contribution will be phased in, possibly at 1% in the first year, 2% in the second year, and 3% in the third year, and a similar arrangement will apply to employee contributions.
Provision will be made so that a new employee, who was paying into a personal account with the previous employer, will be able to continue paying into the same account almost immediately with the new employer.
Employers who already provide a pension scheme, or who intend to introduce their own scheme, may obtain exemption from having to operate personal accounts. They will be able to self-certify to gain exemption if their own scheme provides for automatic enrolment in the same way as personal accounts (although provision will be made for phasing in this requirement) and is of equal or better value than personal accounts. The tests used to determine the comparable value of the employer's scheme will be
- for most defined benefit schemes, the existing scheme reference test which employers already use to decide whether to contract out of the State Second Pension, and
- for defined contribution schemes, whether the employer provides contributions at the same level as personal accounts.
The compliance regime is expected to follow the model used for enforcing the National Minimum Wage, which combines the right of employees to take their case to an employment tribunal with whistle-blowing and risk-based investigation.
Employees who are out of work will be able to continue making contributions to their personal account. Self-employed people will be able to save in personal accounts of their own choosing, subject to the same annual contribution limit.
All of the matters described above are current Government thinking on the operation of personal accounts. Consultation on all aspects of the scheme is on-going, so changes to the current proposals should be expected.
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Further information:
Personal accounts: a new way to save
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