Getting gold in 2012

The problem that the Government faces is that 2.5 million pensioners live in relative poverty and that figure is going up, in fact by 300,000 in 2006/07. The problem has been exacerbated by the decline of occupational pension schemes from their peak in 1967 when over 12 million people were members of workplace schemes. At the start of the millennium there were over 100,000 schemes, this was down to only 78,000 a couple of years ago, a trend that shows no signs of abating. Add to this the fact that medical care and lifestyle changes mean that people are living far longer and you have a conundrum on a vast scale.

The Government unveiled it’s first attempt to solve the problem back in 2001 with the introduction of Stakeholder Pensions, where employers with five or more staff including themselves have to provide access to a work pension scheme. The problem was that all they had to do was provide access. As a result there are thousands of “shell” schemes on insurance company’s books which contain absolutely no money whatsoever. In fact due to the way the rules were set up they are more commonly used as tax planning tools for wealthy individuals.

The Government has therefore decided to have another go at solving the problem, the solution is called “Personal Accounts”. These will apply to all employers irrespective of size, so even if you are a “one man band” with a PA, the rules will apply to you. So unless you already offer a pension scheme at least as good as a Personal Account then for every member of staff earning between £5,000 and £33,000 you will be compelled to contribute, unless your employee opts out.

This “soft compulsion” relies on people making the effort to opt out in much the same way as is often talked about regarding organ donation. As in that scenario the Government’s hope is that most people simply won’t bother.

Assuming your employee doesn’t opt out then they will have to contribute 4% of their Salary while the employer and Inland Revenue matches that with 3% and 1% respectively making a total contribution of 8% of the employee’s salary. The plan is currently to build up to this level over three years from 2012. Another feature is that it will apply from day one of employment unless the employee opts out of the scheme.

Even if the majority of people don’t opt out, 8% contributions will not produce a lavish income in retirement when the accepted minimum for a decent pension is 15%. Add to that the fact that the Treasury’s “means testing” system means that a significant minority of people will be saving their way out of benefits they would otherwise be entitled to and therefore deriving no net benefit. You have to conclude therefore that our pension woes will not be solved by this solution.

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