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Personal Accounts Fact Sheet

The Government has just published its proposals for a personal accounts system that will make it easier for workers to save for their retirement.

It's part of the overall pensions reform programme detailed in the Pensions Bill in November 2006 and in an earlier White Paper. The reforms will bring a number of improvements to the pension system, including a large increase in the number of women receiving a full basic state pension.

The measures outlined in the personal accounts White paper, published on December 12, will affect most businesses and workers in the UK.

To make sure you know what to expect, here is an outline of what the Government has proposed:

1. All employees between 22 and state retirement age will be automatically enrolled into a personal account, or into a suitable workplace pension scheme if one is available in your company.

2. Employees will make a minimum contribution to their account of four per cent of salary, applied to an earnings band of approximately £5,000 - £33,000 a year.

3. This will be enhanced by a minimum three per cent employer contribution and a further one per cent in the form of tax relief.

4. There will be simple, self-certifying tests for employers with existing schemes to apply for exemption. Roughly speaking, your scheme will need to be of broadly equal or better value than personal accounts.

5. If you do not already run a qualifying scheme you will have to decide whether to create one or else participate in the new system.

6. In order to help employers manage the transition, minimum contributions to personal accounts are expected to be phased in for employers and employees over a three year period

7. Employers and employees will have the right to contribute a higher percentage of earnings.

8. Workers will have the right to opt out of the scheme if they so choose, but the Government believes that automatic enrolment at the onset will see between six and ten million people saving in an employer scheme or new personal account.

9. High participation should make management fees lower. The value of some people's pension funds could be boosted by up to 25 per cent compared to some current schemes.

10. Day-to-day management and operations will be outsourced to private sector administrators, but a central organisation will act as a single point of contact for employers and employees alike.

The Government has stressed that working with employers to minimise the impact of these changes is a priority. So, for example, they will gradually phase in the contribution rates and set them in legislation that is difficult to amend.

Personal accounts will also be designed to complement existing pension schemes, not replace them. They will have a contribution cap, and no transfers will be allowed out of existing schemes into the personal accounts system.

If you are running your own business it is vital that you think carefully about your current pension arrangements and how the suggested changes will affect them.

The Government's reform programme will entail the biggest overhaul of the pensions system for 60 years. Don't be left in the dark.

For more information on the Personal Accounts White Paper and the Government's proposals on how to tackle undersaving go to www.dwp.gov.uk

Have your say on James Purnell's blog at
www.dwp.gov.uk/pensionsreform/weblog/