New Dawn as Workplace Pensions Take Centre Stage

For many years personal pensions have had a tarnished image in many people’s eyes as a result of poor investment performance, high charges and complicated rules despite extremely valuable tax savings. I am excited that we are now entering a new dawn for pensions, which should help employees focus on their long-term financial planning and reverse years of decline in retirement saving where less than half the UK workforce has a private pension and traditional final salary pensions are becoming the exception outside the public sector.

Since last October large UK businesses have been required to help employees achieve a good income in retirement by automatically enrolling staff into a pension scheme. However, the impact will be felt much more widely across the West Country over the next year or so as medium and smaller companies are drawn into the auto-enrolment regime. By August 2014, businesses employing more than 60 staff will be affected, with even the smallest firms expected to operate pension arrangements by 2017. The Department for Work and Pensions estimates that 420,000 workers will have been enrolled into a pension scheme by the end of November this year.

Many countries already have some form of mandatory participation in pension saving to help people pay for their old age, such as the New Zealand KiwiSaver, which is generally regarded as a success on the back of generous tax treatment, government support and clear communication. In the UK, the Basic State Pension is currently £110 per week, so for most people private provision is essential to secure an adequate standard of living in retirement.

Of course, forced pension saving will not be universally popular. Some employers regard pension auto-enrolment as yet another cost of employing staff. In addition to providing and registering the details of a pension scheme and automatically enrolling staff, employers will have to contribute to their workers’ pensions, initially 1% gross pay, rising to 3% from October 2018. Businesses will also have an administrative role, such as communicating details of the pension scheme to staff and allowing them the option of opting out. In practice, employers are likely to rely on professional pension advisers to run their pension arrangements and help ensure compliance.

Some employees too will not welcome forced pension saving, initially 0.8% pay, rising to 4% from October 2018. Whilst tax relief will soften the blow, for those struggling to make ends meet, any reduction in take home pay may be difficult to manage. Employees can opt-out of their employer’s pension scheme, although this means losing out on valuable employer pension contributions.

As with any pension arrangement, the ultimate investment returns will depend on contributions, time invested, investment selection, performance and fees. I am looking forward to helping both employers and employees get the most out of pensions in this new era.

[Matthew Clark, Western Morning News, 22 August 2013]

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