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A pension for every employee

By Nicholas Watts

Just when you thought you had heard everything there was to be said about pensions, the Government has come up with some more.

The ‘Personal Account’ has been launched as part of the 2008 Pensions Act. It is the Government’s way of ensuring that every working person has a pension scheme — whether they like it, or not.

As usual, it will be the poor employer who is the one with all the work to do, although the legislation is not due to be fully executed until 2012.

That being the case, why even talk about it now? There are two good reasons that I can think of immediately:

  • It gives us thinking time to prepare
  • If we do not like what we discover, then there is still time to convince our political masters that it is a bad idea

Either way, it makes sense to know what all the fuss is about.

The Personal Account is an automatic enrolment pension scheme for all employees, which obliges an employer to contribute to every employee’s pension pot unless that employee elects to opt out.

But, as you will see, opting out is not going to be simply a case of just ticking a box.

The rigmarole involved will, I feel sure, place an additional and unwelcome burden on smaller businesses in particular — ie those that may not have a dedicated human resource department. Employers will have to contribute a minimum of 6% of qualifying earnings and employees 4% plus 1% tax relief.

The definition of ‘qualifying earnings’ is “all earnings between £5,035 and £33,540” and includes things such as bonuses, overtime, commission and various statutory payments.

For those companies with existing schemes in place, the new scheme is going to be an additional paperwork minefield, with considerable amounts of cross-checking and referencing against the rules.

There will be a raft of standard information for each employer to collect and keep a record of.

I must spare you the detail, but if you cast your mind back to the introduction of the Stakeholder Pension you will recall the plethora of paperwork involved there. It was nothing. With the Personal Account there’s a whole lot more.

Here, for example, are the proposed rules for those who want to opt out.

Employees will not be able to opt out until they have received all the required information and have been automatically enrolled. This has to be documented on the specific form and a discussion between employer and employee will not suffice. The employee then has 30 days to opt out.

During this time, pending the employee’s decision, the employer may well have to deduct a contribution from the employee’s wages. If the employee then chooses to opt out, the money will have to be refunded.

All this has to be managed by the employer and the whole process will, I think, create a lot of confused and disgruntled employers and employees.

As I have already said, this scheme will inevitably hit the smaller business hardest, not least because they tend, currently, to have the lowest take up of employer pension schemes.

Thus they will potentially see the greatest cost increase. Those on a lower wage will also be reluctant to join any pension arrangement, as they obviously need every penny of their pay to cover their living costs.

Employers with existing schemes will also want to know how much extra any new scheme is going to cost them.

Here the only piece of good news or help that I can offer is the use of a relevant spreadsheet designed to do just that.

Nicholas Watts is an independent financial adviser with Positive Solutions Financial Services which is regulated by the Financial Services Authority. To contact him, use the website

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