Money Talk
By David Bird
Towers Perrin
Staff and employers should prepare for a big change in four years with the advent of Personal Accounts in 2012.
You should seek as much advice as possible to help address this tricky decision
David Bird, Towers Perrin
This is the name for the new, government-backed, national pension plan, which will serve as a top-up for the current state system.
It will affect all employees and employers, but the greatest impact is expected to be in the retail sector, in which company pension schemes have traditionally had a low take-up among staff.
The new system will effectively force many workers to save for their pensions for the first time - and force their employers to contribute as well.
Big change ahead
After the Personal Accounts regulations come into force in 2012, your employer will have to either enrol you in a Personal Account, or put you into the company's existing pension plan, provided that the plan is as good as a Personal Account.
Either way, if you do not want to be a member of a plan you will have to opt out.
As part of the process, members of pension plans who do not choose an investment fund for their Personal Account will have their pension monies invested in a Default Fund.
It is anticipated that this automatic enrolment will significantly increase the number of people saving in a pension plan for their retirement.
First time
However, you may find yourself enrolled in a pension plan for the first time and this means you could see a reduction in your take-home earnings of 4%.
So, for example if you take home £285 per week after all deductions this might fall by £14 per week.
Minimum contributions for personal accounts
4% of your earnings between around £5,000 and £35,000
3% from your employer
1% from the Government through tax relief
Note that it is expected that these minimum contributions will be phased in over a number of years
The benefit of this is that, possibly for the first time, you will be building up a nest egg for your retirement in a pension plan, which is also receiving contributions from your employer and the government.
You will need to make sure you are aware how you will be affected.
For one thing, you will need to build the reduction in your take home earnings into your day-to-day budgeting.
With budgets stretched this could be one expense too many.
But, do not forget that the contributions will be phased in over time.
You should look to all the relevant parties for advice: your employer, unions, colleagues, and even your friends and family.
Complex
Pension saving can also have the effect of reducing your means-tested benefits.
For example, the government operates a minimum income guarantee of around £100 per week for a single person over the age of 60.
All state and private pensions together with any earnings and the value of any savings are assessed and income is topped up to the minimum if necessary.
So, saving in a Personal Account may reduce the amount of this means-tested benefit that is payable.
This means, in effect, that you may not get very good value for your savings, even taking into account the contributions made by your employer and government.
Thinking how this is likely to affect you is a very complex decision, because it means thinking about what your situation might be when you retire.
This includes such things as whether you will be in rented accommodation, what other savings you and your spouse may have and what other state and private pensions you and your spouse might have earned.
As if that was not complicated enough, there is also the possibility that the rules will have changed by the time you get to retirement.
Decision
You should seek as much advice as possible to help address this tricky decision.
In fact, the Government is looking at providing some form of basic advice, which will include help around Personal Accounts - if this happens you should definitely use this service.
If you decide that pension savings are a good thing for you, then why wait?
Many employers, including retailers, already provide access to company pension plans.
It may even be the case that you will get a better deal by joining now than by waiting for the introduction of Personal Accounts.
You should ask your employer what is available to you today.
Rising costs for your employer
It is not just you who is affected by this; so is your employer.
The most important point is that if employers have to pay pension contributions for higher numbers of staff their costs are going to rise.
Retailers will need to understand the implications of this.
For them, it could feel like an extra tax and someone will have to pay.
The impact could be a mix of higher prices for customers, lower wage rises for staff and lower returns for shareholders.
Between now and 2012 your employer should communicate with you to help you understand the implications of Personal Accounts.
If you do not understand, ask for help.
This is about how much money you have to spend, whether saving in a pension makes sense and whether you can afford a financially secure retirement.
The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.
