Pensions Advice, Retirement Planning - Investment Financial Adviser Dunfermline, Fife, Scotland UK

Posted by William on December 7th, 2007 in Pension Advice

So what exactly are they?

The new Personal Accounts are the product of the latest Government initiative designed to encourage people to save for retirement. Employees will be automatically enrolled into a Personal Account or approved alternative, with the option to opt out. It is hoped that this auto-enrolment (which begins in 2012) will make it easier for people to save for retirement.

The basic overview is as follows…

• All employees aged over 22 and earning more than £5,035 a year auto-enrolled into a Personal Account (or an equivalent), also able to opt out if they so wish.
• A minimum contribution of 4% from the individual on band earnings between £5,035 and £33,540 a year. Matched by a 1% contribution of band earnings from the Government and a compulsory 3% contribution of band earnings from account holder’s employer.
• Low cost charging: an annual charge of 0.3% of assets under management is what the Government are aiming for and consider realistic.

So is a PA for me?

Whilst the Government are putting a positive spin on them and promising open communication and simple messaging designed to encourage people to see the benefits of using these vehicles for saving for retirement, the truth, as ever, is far more complex.

One aspect to take into consideration is the link between Personal Accounts, state pensions and the tax and mean-tested benefits systems. Anyone with private savings in a pension who also receives pension credit must surrender 40 per cent of the value of those savings. Quite a chunk don’t you think?

Therefore someone with £20,000 in savings would only get income from £12,000 capital value compared to a non-saver. Whilst they would still be better off than a non-saver, it wouldn’t be by the full value of £20,000.

The scale of this potential problem could be huge as it’s likely that three or four people out of every ten are likely to receive means-tested benefits when they retire.

It’s those on very low incomes who qualify for means tested benefits that I worry about.

People at risk of being worse off by being ‘Auto-enrolled’ could include those on low incomes with disrupted employment history, or single people who rent and have no savings – they could lose their housing benefits too.

Additionally, even though they are not auto-enrolled; self employed single people in their forties in 2012 on low incomes could find they don’t get back what they put into the new accounts.

Another point to consider is that although people are automatically enrolled into a Personal Account they will still need to exercise some sort of decision making as to which type of fund to invest in – which is not necessarily easy, especially so for those leery of all things financial, just the sort of person who needs to be auto-enrolled.

In conclusion, whilst it is still early days, the fact is that as things stand just now you have to ask why someone would be willing to invest into a Personal Account and not be one penny better off in retirement than someone who hasn’t saved.

While we still have a system where it pays not to save then the incentive is taken away from potential participants isn’t it? Over to you DWP any answers?