UK Pension Changes - Pensions Act 2008
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by: C Wathen
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Date: Sat, 14 Nov 2009 Time: 7:55 AM
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This Pensions Act should be the last for a few years, because it marks the final primary legislative phase of the pension reforms started by the Pensions Commission (‘the Turner Commission’) in 2005. The most important provisions of the Act are:
Personal accounts
The personal account is the latest government initiative to encourage private pension provision. If you are an employer, no matter how small your staff numbers, personal accounts are likely to affect you.
Any employee aged between 22 and the state pension age with earnings of at least £5,035 a year (in 2006/07 terms) must be automatically enrolled in the personal account pension scheme, if they are not already a member of a scheme that is at least as good in terms of benefits or total contributions.
For each personal account member, the employer must pay contributions of at least 3% of all earnings (not just basic pay) between £5,035 and £33,540 (‘band earnings’ – again in 2006/07 terms).
The employee must pay sufficient personal contributions to bring total contributions (including employee tax relief) up to 8% of band earnings. In practice, this is likely to mean that the employee pays 4%, the employer pays 3% and tax relief on the employee’s contributions brings the total to 8%.
Employees will have the right to opt out, but if they do so they will be automatically re-enrolled every three years or when they change job. The self-employed and ineligible employees (aged under 22) will have the right to opt in.
There are strict provisions to prevent employers encouraging their employees to opt out, eg by offering more pay to non-members. Personal accounts will be set up as a single occupational scheme by the Personal Accounts Delivery Authority (PADA), a ‘non-departmental public body’, and ultimately managed by an independent trustee corporation. Personal account charges are likely to be very low and initially the choice of investments will be strictly limited.
The target date for launching personal accounts is October 2012, although this is by no means fixed. In any event, contribution levels will be phased in over at least three years from launch.
Contracting out
The Act provides for an end to opting out (technically ‘contracting out’) of the state second pension scheme (S2P) by way of personal pensions or money purchase occupational schemes. No date has yet been announced, although the expectation is that it will be April 2012, when the current five year set of national insurance rebates expire.
To some extent, this is only recognising the inevitable. Contracting out rebates are relatively unattractive. They have already encouraged many people to join (or rejoin) S2P.
If you are a member of a final salary (defined benefit) contracted out scheme, the change will not affect you, although it remains to be seen how long the government will keep this option open.
Preserved pensions
If you leave a final salary scheme after 5 April 2009, eg on changing job, the Act will reduce the statutory inflation protection given to part of your pension benefits. For all benefits accrued after that date, the statutory increase until retirement will be the lesser of inflation and 2.5% a year, compared with the present ceiling of 5%.
If you need help in planning for these changes, let us know. Levels and bases of, and reliefs from, taxation are subject to change and their value depends on individual circumstances.
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About the Author
Chris Wathen is author of this article on Individual wealth management. Find more information about Earnings protection plan here.
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