Will new workplace pensions make a difference?
The government estimates that seven million employees are saving too little for retirement, so from 2012 it is introducing the personal accounts scheme for employees who don’t currently have a good quality work-based pension plan.
Employers will have to automatically enrol all eligible workers (aged over 22 and earning more than £5,000 a year) into either a workplace pension scheme or a personal account. Automatic enrolment means that instead of choosing to opt into pension saving, as happens now, workers will have to go through the effort of opting out of the personal account or company pension plan if they don’t wish to save that way.
Employers will have to contribute 3% of each employee’s salary to the workplace pension scheme, while a further 4% will be taken out of the employee’s pay before tax. The government will pay in another 1% in tax relief. Contributions will be capped at £3,600 a year, though if you have spare savings you can pay in up to £10,000 in the first year.
But will personal accounts really encourage more people to save for retirement?
Yes says Tim Jones, chief executive of Personal Accounts Delivery Authority:
Current population projections suggest the number of people aged 65 and over will double by 2055. While the state pension can give people a foundation income, for many it will not be enough. At least seven million of us may not be saving enough for our retirement. The government's workplace pension reforms seek to address this.
From 2012, all employees will be enrolled into a pension scheme and will have a right, should they stay opted-in, to a contribution from their employer. As one of the workplace pension schemes that employers can use to meet their new duties in 2012, the personal accounts scheme is a key aspect of the reform.
The scheme ensures the gap in provision is filled for those who currently don't have access to workplace pensions, either because their employer doesn't provide one, or because they don't meet the qualification criteria.
Under many existing workplace pension arrangements, seasonal workers, contractors and women who take career breaks miss out. Many employers will choose to use the personal accounts scheme to ensure these groups receive their employer contributions.
Personal accounts will be a low-charge pension scheme accessible to all employers who want to use it, in particular those on low to moderate earnings. The impact of lower charges can be substantial on smaller pension pots, boosting the final value by as much as 40%.
The scheme will be run by a not–for–profit trustee corporation, solely in the interests of its members.
The scheme will also help facilitate a culture of pension saving among people who have not previously engaged in saving for their retirement, supporting these people in their attempt to take some responsibility for their future.
No says Steve Bee, head of pensions strategy at Scottish Life:
Our pension system is far from perfect, but saving for a pension today is a voluntary act; no one is compelled to save. From 2012 that will change when millions of employees who are not in company pension schemes will be auto-enrolled into qualifying workplace pension schemes.
It will not be compulsory for employees to remain as members of such schemes, but it is hoped that inertia will prevail and they will stay opted in.
I think we deserve a pension system that does right by people who do the right thing. Plenty of people already do the socially responsible thing of deferring income for later in life. People saving for the future are doing the right thing by themselves and by the rest of us.
I don't like the way our current pension system can act against people who, although they don't earn very much, choose to do the right thing and save, yet still stand to lose out through the withdrawal of the means-tested entitlements that non-savers benefit from in retirement.
This is a fundamental issue that will lead to enormous problems if millions of people are to be auto-enrolled into pension saving without this unfair system being reformed first.
The government's response to the problem has been to introduce a new qualifying workplace pension scheme that will have very low charges – personal accounts. But to me that is ducking the real issue.
Unless every pound paid into a pension scheme by employees and their employers provides at least a pound's worth of value to the employee in retirement, such an investment could be an unsuitable one for them to make.
What people in this country need is a reformed pension system that does not penalise savers. Whether we need a new pension scheme called 'personal accounts' is not really the relevant question.