30 January 2009

Personal accounts (NESTs)

The Government is concerned that people are not saving enough for their retirement (because the state cannot afford to provide significant benefits as the number of workers is falling, compared with those in retirement). It has therefore legislated for the introduction of Personal Accounts in 2012, as part of the Pensions Act 2008.

Personal Accounts are a new 'mandatory' pension scheme for most employees who are not already in an employer's pension scheme, providing an employer contribution of at least 3% of "qualifying" earnings (these are earnings between a lower and upper earnings limit which were set in 2006/7 terms at ?5,035 and ?33,540 respectively, but this will increase each year) plus employee contributions.

So what does this mean in practice?
Many employers already provide access to a pension scheme for their employees, either as an occupational scheme or a designated group personal pension. However in the former case, contributions may be expressed as a percentage of basic income, rather than total income, which is unlikely to be adequate. In the latter case, employees do not have to join, so if no employer contributions are made, this will not be acceptable.

For those companies which are not exempt, there will be a requirement to enrol all employees into Personal Accounts unless they opt out; in which case, they must be auto-enrolled every three years. This will apply to all employees between 22 and State Pension Age.

The target is that employees will pay 4% of band earnings, employers 3% and the Inland Revenue 1%, making a total contribution of 8%. This will be invested in a Personal Account, although the administration and investment strategies are still under consideration. During the first two years, the actual level of contributions will be lower with the employer contribution phased in at 1% in year 1 and 2% in year 2.

Employers can make larger contributions, if required, but limits will apply and many may feel that an occupational or personal pension could offer better value for money.

What must a scheme offer?
To "self certify" that an existing scheme is suitable and the employer is exempt from offering Personal Accounts, it must satisfy the following rules:

• Money purchase occupational schemes - the employer contribution must be at least 3% of qualifying earnings and total employer/employee earnings must be at least 8% of qualifying earnings;
• Defined benefit schemes (contracted out of the Second State Pension (S2P)) - must offer benefits at least as good as those required to meet the reference scheme test;
• Defined benefit schemes (not contracted out of S2P) - must offer benefits broadly equivalent to or better than a Model test scheme, basically that benefits are at least 1/120th of pensionable salary for each year of pensionable service (up to a maximum of 40 years);
• Personal pension schemes - the employer contribution must be at least 3% of qualifying earnings and total employer/employee earnings must be at least 8% of qualifying earnings.

YOU SHOULD ALWAYS SEEK PROFESSIONAL ADVICE BEFORE TAKING ANY ACTION IN CONNECTION WITH YOUR PERSONAL FINANCES. THE VALUE OF INVESTMENTS IS NOT GUARANTEED AND WILL FLUCTUATE; YOU MAY GET BACK LESS THAN YOU PUT IN.

NOTHING CONTAINED IN THE ARTICLE SHOULD BE CONSIDERED AS GIVING INDIVIDUAL FINANCIAL ADVICE.