Government initiatives on pensions have been regular feature of the 21st century. There has been the launch of the stakeholder pension, a reworking of the state second pension, the introduction of pensions tax simplification and a major working of the basic state pension.

The next episode will begin when the latest Pensions Bill completes its passage through parliament this autumn, making it the third Pensions Act to reach the statute book in five years. The Pensions Act 2008 sets the framework for the next major development in pension provision: personal accounts.

Whether you are an employer or an employee, personal accounts could have important consequences for you. The key features of personal accounts are:

•  All employees aged between 22 and State Pension Age will be automatically enrolled unless their employer provides suitable pension provision. Employees can opt out, but if they do so they will be re-enrolled every three years or on changing employer.

•  An employer will have to contribute to their employees' personal accounts unless the employer already makes at least similar contributions on their behalf to another pension arrangement.

•  The employer contribution will be 3% of employee earnings between about £5,500 and £36,400 a year (in 2008/09 terms) and the employee's contribution will be 4% (plus 1% tax relief) making a total of 8%. The exact bands will be determined nearer the start date (likely to be in 2012) and full contribution levels will be phased in over three years.

•  Personal accounts will be operated independent of government, although at this stage there is heavy government involvement in the development of the Personal Accounts Delivery Authority (PADA).

The logic behind personal accounts is the need to boost retirement provision for low-medium earners with little or no current pension provision. The element of quasi-compulsion is not without controversy, because for a minority of employees the pension that they gain from their contributions to a personal account will be matched by the state benefits they lose by having a higher retirement income.

ACTION
If you can see yourself contributing to a personal account – as an employer or an employee – it could well be that you should not be waiting for the government to prod you into action. There are plenty of pension options available now, nearly all of which offer more investment choice and benefit flexibility than personal accounts are likely to.

The personal account will be the universal pension default option. If you want something that is more truly ‘personal', talk to us.

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This news item is provided strictly for general consideration only and is based on our understanding of law and HM Revenue & Customs practice as at July 2008. No action must be taken or refrained from based on its contents alone. Accordingly no responsibility can be assumed for any loss occasioned in connection with the content hereof and any such action or inaction. Professional advice is necessary for every case.

Burley Financial Services Ltd is a private limited company registered in England and Wales under company no. 121 7536.
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