Saving for retirement is a challenge for many of us. But new government plans should see it get a whole lot easier.
Did you know the Pensions Act 2008 received Royal Assent last week?
Who cares, right?
I know passing a piece of pension legislation is hardly stunning front page news but, all the same, it could be pretty significant to you in years to come.
It means the government's grand plan for pensions -- which will happen in 2012 -- has now been given the official go ahead. And this could make a big difference to nine million working people who don't already have access to a work-based pension.
So listen up because these reforms could help you.
What is the government's grand plan?
From 2012 you'll get help saving for retirement from your employer and the government through a new system of compulsory pensions. As long as you're aged between 22 and state pension age and you earn more than £5,035, you'll be joining in*.
All employees will automatically be enrolled in a new national pension scheme known as Personal Accounts. Compulsory contributions will be deducted from your salary. On top of that, employers will be required to pay money into the account on your behalf too. However, you will have the right to opt out if you wish.
If you don't opt out, you must pay in at least 4% of your salary while your company will contribute a further 3%, and an extra 1% will come from the government in tax relief. This means the total minimum contribution to the Personal Account will be 8%, but you'll only have to pay half of that out of your own pocket with pension savings matched £1 for £1.
Sounds great, doesn't it!
If there's already a pension scheme at your company and the minimum level of contributions are already being paid, then there should be no real change to your pension provision. The scheme can simply continue in the same way as it did before 2012. This means any occupational pension scheme or group personal pension at your company can stay in place unchanged as long as it is comparable with Personal Accounts.
Are Personal Accounts good news?
Personal Accounts will give you access to a pension whether your company enrols you into the national system of Personal Accounts, or you continue to save into an existing work-based scheme which meets the government's criteria.
The new pension rules should force a fundamental change in the system. As it stands today, you must actively apply to join a pension scheme if you want to save for your retirement. There's no requirement to save a minimum amount, and no obligation on your employer to pay into a scheme on your behalf either.
But this year's Pensions Act will change all that. Personal Accounts should help to overcome the idea that pensions are optional. Apathy is seen a huge barrier to pension saving right now. But when 2012 arrives, general inertia could mean people are more likely stay in the scheme. Although you will have the right to opt out if you don't want to hold a pension.
What's more, Personal Accounts should benefit you if you aren't currently offered a pension at work. For example, if you work on a temporary basis or you're a contract worker, you'll usually find work-based pensions aren't open to you. But you'll automatically be included just like permanent staff from 2012. And if you work at a small business you'll now have access to a pension where previously no provision was usually on offer.
In fact, the new system is designed to be a whole lot more inclusive than it was before meaning that if you're on a low income or you don't have a regular work pattern, a pension will still be available to you.
Is there a downside?
Yes. Think about the costs involved in setting up a scheme which is available to all staff and potentially a huge pension contributions bill for your employer to pay. So the crucial question is: How will these costs be met? Will you simply lose out on other staff benefits or perhaps receive smaller pay rises and/or bonuses?
If the costs are too high, your company may be discouraged from contributing any more than the bare minimum. And companies which paid more generous contributions than the minimum before 2012, could take the opportunity to reduce them in line with the national scheme, leaving staff worse off.
And what about the expense to you as an employee? When 2012 arrives, you'll have to pay at least 4% into a pension -- but isn't that rather like a sudden 4% pay cut for those of you who had no pension provision before? Where affordability is a problem, the opt out rate could be far higher than the government hopes. And if a lot of employees opt out, the system won't achieve its objective of helping to solve the UK's pension problem.
On a final note, there's absolutely no doubt the current pension system isn't really doing the trick. At least many of us do now realise we aren't doing enough to plan for retirement. But will Personal Accounts succeed in tackling the problem? I'm sure many pension experts would argue saving 8% of salary isn't nearly enough to build up a decent pension pot. But at least it's a start.
*Because the new system is based on a combination of compulsory contributions from employees and employers, it won't apply to self-employed people.
More: Could This Be The Solution To The Pensions Crisis? | Read more retirement and pensions articles here