Ahead of the recent Autumn Budget, there was speculation about potential changes to inheritance tax and national insurance, but minimal mention of a “pot for life”. A continuation of the ongoing pension reforms, this has generally been well received by the industry and consumers. However, there are several pros and cons to consider as the government consults with the industry.
What is a “pot for life” pension?
Under current legislation, employers are obliged to enrol eligible employees into a pension scheme chosen by the company. The minimum pension contribution per employee is set at 8% of their earnings, with a minimum 3% contribution from the employer and 5% from the employee. At this moment in time, the average person is expected to have 11 different jobs in their lifetime and potentially 11 different pension pots. There lies the problem!
The UK government wants to create a “pot for life”, forcing employers to contribute to a pension plan chosen by the employee. So, for example, if you had a SIPP, your employer would be obliged to contribute a minimum of 3%. While many employers are currently paying into employee personal pensions, this is by choice, not a legal obligation. Payment into a company scheme is a legal obligation but not a private pension.
The benefits of a “pot for life” pension
There are undoubtedly several benefits when it comes to the proposed pension reforms, which include:-
- Ease of administration
- Reduction in the number of “lost” pensions
- Potential cost savings
- Greater investment choices
- Enhanced flexibility
Looking at the potential benefits, it is difficult to understand why these reforms were not brought forward earlier. However, this brings up the possible disadvantages of the changes.
The disadvantages of a “pot for life” pension
As we begin to delve deeper into the details, a number of issues are emerging which will need to be addressed:-
- Increased administration costs for employers
- Removal of charging cap (currently applied to employer pension funds)
- Concerns regarding pension product suitability
- Administration of tax relief
- Removal of regular employer pension scheme review
While the industry is not suggesting that the “pot for life” pension reforms are not helpful, it is crucial to consider the broader concept.
Are lost pensions really a problem?
As we mentioned above, the average worker in the UK is expected to have around 11 different jobs in their working life. The statistics regarding lost pensions are alarming, with research showing:-
- One in 20 people have a pension they knew nothing about
- 2.8 million pensions are lost/forgotten
- Lost pension funds equate to £26.6 billion
- An average of £9500 per person
The proposal has certainly created a heated debate within the pensions industry, although, at this moment in time, there is no timescale for the potential introduction.
Summary
The idea of enhancing employee pension choices is said to be based on the Australian system, which is very different from the UK. Inadvertently, this has highlighted the difference between minimum employer contributions, 3% in the UK and 12% in Australia. As the UK government looks to encourage individuals to save for their retirement, we can expect more pension and savings reforms going forward.
While recent pension reforms have been well received by employees, it is important to make the right decision for your situation. If you would like to discuss your pension arrangements in more detail, please contact us, and we can review your options.