Pensions and retirement planning
Preliminary lessons from auto-enrolment
With feedback from the first roll-out of auto-enrolment coming in, the Department for Work and Pensions (DWP) is now consulting on changes aimed at simplifying the process for employers.
A key concern is around the administration, characterised as complex and time-consuming. This could cause major problems for small and micro-employers who do not have financial advisers. There are two main areas of proposed change that should make these employers’ task easier.
• Pay reference periods There is currently a disconnection between the definition of pay reference periods and payroll systems that have been developed to work for PAYE and national insurance. Problems have also come to light when the earnings threshold changes part-way through a pay reference period. Under the new proposal, employers will be able to align pay reference periods with tax periods to simplify their processes.
For example, if someone starts work on 1 April and is paid on 30 April, they will not have a payday during the tax period ending on 5 April − the usual date for changes to earnings thresholds. The proposed changes will allow for the first pay reference period for automatic enrolment to be deemed to start on 6 April and end on 5 May, with the earnings paid on 30
April determining whether automatic enrolment applies.
• Opt outs Employers will be exempted from automatically enrolling anyone who has opted out of a scheme where contractual joining applies within the 12 month period before the employer’s staging date. The timescale for the employer implementing automatic enrolment for new employees could be extended from a month to six weeks under the proposed amendments.
The Government also proposes that certain groups of employees, including those with enhanced or fixed protection, should be exempted from automatic enrolment.
These amendments, together with some technical changes, should reduce the likelihood of errors being made that are difficult to unwind later on. They should also make it easier for employers to meet their requirements and ensure that those for whom automatic enrolment would be appropriate can access the scheme.
Proposals to deal with small pension pots
New plans have been announced to legislate to allow for small pension pots of up to £10,000 to be transferred automatically to a new employer’s pension scheme. Opt-outs will be available for scheme members.
The consensus is that people move jobs on average seven times over their lifetime, although there is little definitive evidence. Auto-enrolment could mean an average of seven pension pots per person. The Government’s proposals are meant to deal with this daunting prospect.
Automatic transfers will only be made between money purchase pension schemes, including personal pensions, and will not take place where the existing pension includes guarantees. They will also not apply initially to pension arrangements started before a date in the future that has still to be announced.
How will it work
There are different ways in which the transfer of an individual’s small pots might be accomplished. A central database could be used to facilitate the transfer process. When a member moves employment with a small pot or after no contributions have been paid for a specified period, the scheme will register the benefits on the database. The new scheme will then be able to interrogate the database and initiate the transfer.
Individuals moving to new jobs could alternatively be given a pension statement that is similar to a P45 to pass on to a new employer. The new scheme would then use the statement to initiate the transfer.
The pensions industry will need to agree proposals for the central database before either method could be implemented.
The Government’s proposal is already controversial among those who would have preferred either a special scheme or schemes to be set up specifically to receive transfers of small pots, or for the national employment savings trust (NEST) to fulfil that role. Individuals could lose out, they suggest, if the new scheme has higher charges than the old one. The Government has responded with further proposals for minimum standards for receiving schemes, although it is not clear whether this will include a charge cap.
The Government has also announced that from 2014 it will scrap short service refunds under which occupational scheme members can receive their contributions back if they leave within two years.
The Office for National Statistics has updated two chapters of Pension Trends: chapter 9 dealing with pension scheme funding and chapter 10 which looks at savings for retirement. The latter item made a few headlines with the fact that the cost of buying £5,000 a year income for a male aged 65 had increased by 29.5% since December 2009.
It would have helped if the press had made clear that this was an index-linked annuity − for level annuities the rise is about 25.5%, about half of which is down to the move to unisex rates.
Meanwhile, HMRC revised some of its Registered Pensions Scheme Manual (RPSM) pages. The more interesting changes are the clarification that some old retirement annuities with benefits based on pension income rather than accumulated fund are ‘defined benefit arrangements’ for tax purposes, not money purchase arrangements.
The revised pages also underline the considerable scope for reshaping a lifetime annuity on transfer to a new provider.