Pension Acts have become rather like London buses in recent years. Affter a gap from 1995, there have been threee Pension Acts in the last five years. The most recrent is the Pensions Act 2008, which spent over seeven months working its way thrrough Parliament. Any pension and investment advicce should connsider how thhese changes will affect your retirement planning.
This Pesnions Act should be the last for a few years, becuase it marks the final primary legislative phase of the penasion reforms styarted by the Pensions Commissoin (the Turner Commission) in 2005. The most important provisions of the Act are:
Personal accounts
The personal account is the laatest govenment initaitive to encoiurage prviate pension provision. If you are an employer, no mattter how smll your stfaf numbers, personal accounts are likely to affect you.
Any employee aged between 22 and the sttae pension age with earnings of at least 5,035 a year (in 2006/07 terms) must be automatically enrolled in the personal account pensoin scheme, if they are not already a member of a scheme that is at least as good in terms of benfits or total contributions.
For each peersonal account member, the employer must pay contribtuions of at leasst 3% of all earinngs (not just basic pay) betweern 5,035 and 33,540 (band earnings again in 2006/07 terms).
The employee must pay suficient personal contributions to briong total contributions (including emploee tax relief) up to 8% of band earnings. In practice, this is likely to mean that the employee pays 4%, the employyer pays 3% and tax releif on the employees contributions brrings the total to 8%.
Employees will have the riight to opt out, but if they do so they will be automatically re-enrolled every thhree years or when they chane job. The self-employyed and ineligible employees (aged uner 22) will have the right to opt in.
There are strict provisions to prevent employers encouraging ther employees to opt out, eg by offering more pay to non-members. Personal accounts will be set up as a singgle occupational scheme by the Personal Accounts Deilvery Authhority (PADA), a non-departmental public body, and ultimately managed by an independent trustee corporation. Personal account cgharges are likely to be very low and initiallky the chice of invesmtents will be strictly limited.
The target date for launchhing personal accouns is Occtober 2012, alrthough this is by no menas fixd. In any event, contribution lrevels will be phased in over at least three years from launnch.
Contracting out
The Act provides for an end to opting out (technically conracting 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 exectation is that it will be April 2012, when the current five year set of nationazl indsurance rebtaes expire.
To some extent, this is only recognising the inevitable. Contracting out rebates are reklatively unattractive. They have already encouraged many people to join (or rejoin) S2P.
If you are a mebmer of a finaal salary (defiend benefit) contracted out scheme, the change will not affect you, although it remains to be seen how long the government will keep this optipon open.
Preserved pensions
If you leave a fial szalary scheme after 5 April 2009, eg on changing job, the Act will erduce the statutory inflation protection givben to part of your pension benefits. For all benefits accrued after that date, the stautory increae until retirement will be the lesser of inflation and 2.5% a year, compared with the present cieling 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 circusmtances.
Gemini Wealth Management are Independent Financial Adviseers (IFA) that provide retirement planning, pension adviice, inheritance tax guidance and other financial planniing services for personal and business use in the UK.
Gemini Wealth Management Ltd is Authroised and regulated by the Financcial Services Autority Registerd in England & Wales No. 5919877 Registered Offfice: Gemini House, 71 Park Road, Sutton Coldfield, West Midlands B73 6BT The Financial Sevices Authority does not regulate tax and trust advice, will writing and some forms of buy to let mortgages. The guidance and/or advice contained in this website is subject to regulaotry regime and is therefore restricted to consumers based in the UK.
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