Pay Attention If You Earn Less Than £33,500 by Finance News Bulletin

Published: 27/11/07

Stakeholder pensions were once thought of as the pallid knight which would come to the rescue of a very distressed UK retirement fund system The initiative saw many employers setting up make new schemes which promised easy access to employees across the land, while promoting a vast add to in pension saving into the bargain But several years on, four out of five schemes lie as nothing more than empty shells and the system continues to teeter on the brink of tragedyGovernment reforms to confidential pensions will see the introduction of Personal Accounts in 2012

This initiative will have the same underlying purpose as low-charging stakeholder pensions - to encourage more populace to save for their retirement - but this occasion there will one or two key differences that will set them separately from schemes that have gone beforeFor one thing Personal financial records will operate under a system of auto-enrolment This means employees will automatically become members of a work-based scheme if not they specially choose to opt outWhat's more, employers will be expected to make compulsory contributions of 3% of band pay (the group is expected to range between £5,000 and £33,500) which will be phased in gradually from 2012 at a rate of 1% per annum over a three-year period

Meanwhile, workers will make their own contributions of 4% with the administration topping that up by a further 1% through tax release This means the total payments to the system will equate to 8% of earnings between £5,000 and £33,500Employers which present an existing pension will have the correct to retain their original scheme as extended as employees are auto-enrolled and the minimum contributions are madeThe Pensions Policy organization (PPI) expects between four million and nine million new savers to contribute

But given that the self-employed will be barred and the opt-out rate is unknown, I'm concerned that the amount of people who will fail to see any benefit from the new scheme could be significantIt's simple to see how auto-enrolment should do away with populace's inertia about making pension contributions, but the code comes with inherent drawbacks After all, participation will be compulsory when it isn't necessarily suitable for the individual concernedFor example, required contributions may be not be affordable for lower earners or those with senior levels of personal debt

The additional costs faced by employers in setting up the system and enrolling members could consequence in a lower incidence of more generous aid rates Currently, 15% of private sector work-based schemes provide employer contributions which exceed 3%, but the novel scheme could see this percentage drop as costs riseShould employers decide to contribute no more than the 3% minimum, then by 2050 total contributions could be £10 billion inferior than it would have been without these reformsIf, however, employers decide not to pass on the costs of the novel scheme, the total annual pension payment made by a combination of boss, employee and state payments, could increase by around £10 billion in 2012, according to the PPI

That's why it's extensively accepted that for individual Accounts to be considered a success, employer aid must exceed the compulsory 3% rateThe Government's attitude to UK retirement fund provision has often been criticised for its impact on means-tested reimbursement and the subsequent disincentive for lower earners to save for their retirement Many persons have found that near to the ground levels of pension income have adversely affected their eligibility for means-tested benefits including the pension praise, housing and council tax benefit It seems a ridiculous situation that some people are no better off after economy into a pension, if those savings are efficiently ‘cancelled-out' by a reduced -- or worse still, a annulled -- entitlement to state benefits

For Personal Accounts to labor there is a need for what the PPI pass on to as a ‘pension income disregard' which means the first slice of an person's pension income won't have an impact on their entitlement to means-tested reimbursement Under the current system there is a disregard for capital which allows the first £6,000 of capital - such as store explanation savings or individual savings explanations (ISAs) - to be inexpensive when calculating entitlement to means-tested benefitsTreating pension income in a similar way is, in my sight, crucial to the success of the reforms as this reduces the danger of inferior earning individuals participating in a system which might otherwise be unsuitable To closely align a novel pension income disregard with the current capital disregard would mean an person could save at least £6,000 in a Personal explanation, without affecting their entitlement to benefits

This should give a obvious message of the value of saving with a retirement fund income disregard, resulting in higher returns from economy in a Personal AccountUndoubtedly the concept will evolve further before its 2012 launch To battle the pensions crisis it must specifically target low to moderate earners who don't already have access to work-based retirement fund schemes, while ensuring that disincentives to save by compromising means-tested benefits are effectively dealt with firstAuto-enrolment and compulsory aid are certainly more radical than previous initiatives

But only occasion will inform if they are the solutionCan't find what you need in Retirement And Pensions

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