Pensions Reform: Personal Pension Accounts
Personal Accounts
Personal accounts are the Government’s Big Idea. They are extremely concerned by how many people do not have adequate pension arrangements in place and have designed the personal account pension savings system to deal with this problem.
What Are They?
Personal accounts are effectively low-cost private pensions for people without workplace pensions. Their main features are:
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Employers are required to contribute 4%
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Can be taken with you when you change jobs
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Very low costs
Personal account pensions will be targeted specifically at people aged 22-65, earning over £5,000 per year and who are not participating in a pension scheme including at least a 3% employer contribution.
The government estimates that 10 million people currently fall into this category.
How Do Personal Accounts Work?
From 2012, all employees not in a suitable workplace pension will be automatically-enrolled in a personal account.
You can opt out if you want to, but the government has chosen to make enrolment automatic to encourage more people to use the new system.
You will be required to contribute a minimum of 4% of your earnings – which will be matched by your employer – making a total of 8% each year.
You can contribute more if you want, up to a yearly contribution cap (limit) of £3,600. This limit will increase in line with earnings each year, so should effectively remain constant.
The government’s target is for the annual fees / charges for the personal account to be no more than 0.3% of the amount in each person’s account. This is a lot cheaper than a typical private pension, which charges 1.5% in fees each year.
The personal account system will be centrally-administered by an independent board who will decide how the funds are invested and so on. Although you won’t have the same range of choices as with a private pension, the lower fees and greater simplicity should make the system more useful and accessible, especially to people on lower incomes.
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