MSE News: Pension timebomb warning as Govt unveils saving scheme

dunstonh

2. A workplace money purchase pension I'm in. BGI Aquila Life UK Equity Index Fund (FTSE All-share tracker), 0.10% annual charge, only available to employees in similar company money purchase schemes or institutional investors.

A lot of COMPs/CIMPs have that sort of level and is exactly what i was referring to.

Dunstonh,

"6. Employers will have to contribute a minimum of 3 per cent on a band of earnings, although they can contribute more than this. The total minimum contribution for eligible workers must be 8 per cent of the band of earnings. This is made up of employer contributions, worker contributions and tax relief."

They may use the word tax relief but its not tax relief in the same way it is for personal pensions. Its a fixed contribution irrespective of your tax rate.

Ever since the the NPSS was announced, there has been no documentation on whether there will be higher rate relief on it and the wording has always focused on the 1% govt contribution. The limit of £3600 more or less means there wont be.

So, if you are a higher rate taxpayer, would you prefer to have a group personal pension and get higher rate relief on your contributions or be in the Govt scheme and get a govt contribution that equates to basic rate relief?

jamesd

I'd say it seems unclear how higher rate tax relief will work on this at present. If the documents call it tax relief that at least implies higher rate relief for anyone on higher rate who's unlucky enough to be involved. Given the target market and the aim to make it easy to understand I can see why the focus would be on 4:3:1.

Say £1800 employee contributions at higher rate as the 4%. Employee gets 3/4 of that from the employer, £1350, and 1/4 in tax relief at basic rate, £450. Total the £3600 limit of this scheme.

Or for the same £1800 employee can forget employer contribution and get £1200 in higher rate plus basic rate tax relief, £1200, total £3,000. So the scheme still looks better.

Now add in salary sacrifice and an extra say 15% for employer and employee NI saving on £3000 (gross equivalent of the £1800), an extra £450, total £3450. Still less than the £3600 but it's getting interesting for the employer if the employer doesn't have a 3% obligation. To match £3600 they would only need to top up by another £150, 0.33% of salary instead of 3%. For the employer this looks like a better deal than NPSS, saving up to £1200 a year, enough to cover potential higher administration costs.

dunstonh

I'd say it seems unclear how higher rate tax relief will work on this at present.

and its still under consultation so can change.

If the documents call it tax relief that at least implies higher rate relief for anyone on higher rate who's unlucky enough to be involved. Given the target market and the aim to make it easy to understand I can see why the focus would be on 4:3:1.

The use of tax relief is new. Previously it was Govt contribution.

The position of it being available and focused to low earners and based on band earnings and there being no mention of basic rate tax relief or higher rate relief is the concern.

Or for the same £1800 employee can forget employer contribution and get £1200 in higher rate plus basic rate tax relief, £1200, total £3,000. So the scheme still looks better.

Now add in salary sacrifice and an extra say 15% for employer and employee NI saving on £3000 (gross equivalent of the £1800), an extra £450, total £3450. Still less than the £3600 but it's getting interesting for the employer if the employer doesn't have a 3% obligation. To match £3600 they would only need to top up by another £150, 0.33% of salary instead of 3%. For the employer this looks like a better deal than NPSS, saving up to £1200 a year, enough to cover potential higher administration costs.

If a company chooses to not use the NPSS then they have to offer a scheme that at least matches the NPSS. So, the 3% employer contribution still has to be there.

Many companies that do use a group personal pension or COMP are also not only going to limit their 3% to band earnings but to either a pensionable income (i.e. basic salary not including overtime) or to the whole gross income.

marklv

It's laughable that employers will only need to contrubute 3% of salary; I would have thought 10% was more suitable.

Sunnysider

Sunnysider wrote:

I'm sure as a relative newbie my posts have not been too welcome, but whilst think there are a few gaps in the NEST policy myself think it is wrong for blatent mis-truths to be told by someone respected on the forum.

Dunstonh wrote:

I am happy to accept your apology for your mistruths.

Sorry for the delay in responding. There were many websites which backed up my facts but I wanted to wait until the Regulations were laid which happened earlier today as these back my arguments up somewhat more.

Sunnysider wrote:

Completely wrong. [referring to an earlier Dunsonh comment which said there was no tax relief] There is full tax relief on the first £3,600 of contributions.

Dunstonh wrote:

Since the earliest proposals there has not been tax relief on the NPSS/Personal Account or whatever name they end up going with. It is a Govt contribution of 1%. It is not tax relief.

Sunnysider wrote:

As an IFA I'm astonished that one you don't know this, and two given you don't know it you're prepared to put a false statement such as this down.

Dunstonh wrote:

If it is tax relief, please be kind enough to tell us what level of Govt contribution a higher rate tax payer will get on the Govt scheme. And then tell us what level of tax relief they will get on a conventional pension. You will find there is no higher rate relief on the Govt scheme as its a fixed contribution. Unlike a personal or group scheme.

Dunstonh wrote:

So, it is not tax relief but a fixed Govt contribution irrespective of your tax rate.

As stated many websites such as Which have stated that there is tax relief http://www.which.co.uk/advice/personal-account-pensions-explained/index.jsp as a pensions PROFESSIONAL they are not my number one source for technical knowledge but I’ve used them as an example here as they are probably the best regarded by the community. You will see that this states “You’ll pay in 4% of your earnings, your employer will chip in with an extra 3% and you'll get 1% tax relief.”

You will note from the Enrolment Information 2.f of the The Occupational and Personal Pension Schemes (Automatic Enrolment) Regulations 2010 which were laid before Parliament today that one of the requirements of enrolling an eligible jobholder into an automatic enrolment scheme is
“confirmation as to whether tax relief is or will be given in accordance with section 192 (relief at source) or 193 (relief under net pay arrangements) of the Finance Act 2004(a);” Source = http://www.opsi.gov.uk/si/si2010/draft/pdf/ukdsi_9780111490655_en.pdf

As I have previously stated NEST is only one such auto-enrolment scheme there may be many more. You will note that these Regulations apply to all auto-enrolment schemes and not just the NEST Scheme.

So, in answer to the question presented. The level of tax relief that a member will get in the NEST scheme is EXACTLY the same as they would get in any other scheme. If a higher rate tax payer pays into the NEST scheme (and yes I do agree with you that it might not, in fact almost certainly would not be the best option for them) they would receive basic rate direct into the scheme and would be able to claim higher rate via their tax return.

Dunstonh wrote:

The use of tax relief is new. Previously it was Govt contribution.

Did I miss your apology?

In relation to the next point.

Would private sector charges really be less given the small amounts involved for each person? Could I really provide myself or a small number of employees with a pension more cheaply?

Dunstonh wrote:

They would be yes. Group schemes with members actively contributing are far more profitable than individual stakeholder pensions. Many of the insurers already have online systems and methods to take money via the employer and payslip to handle the volume schemes. Why reinvent the wheel? especially if the taxpayer is going to fund it.

Sunnysider wrote:

If it were true that the private sector could do with lower chargers then exiting providers would be offering competitive products.

Dunstonh wrote:

They are. It is currently possible in the private sector to have as low charges than those being proposed under the Govt scheme.

Dunstonh wrote:

For higher rate taxpayers, the loss of higher rate relief will be more damaging that 0.1% amc differences. It is hoped that companies with higher rate taxpayers on the books will use personal schemes and not the Govt scheme. Employees need to put pressure on their employer to make sure the Govt scheme is not used but a private scheme is.

I think you have missed the point of the NEST scheme. It has deliberately been designed not to complete with the existing market place. It is being designed to fill a gap in the market which the Private Sector does not want to go near. There are several factors of the scheme which have been widely consulted on which cover these points. If you look at the NEST Scheme Order which again was laid today and can be found here http://www.opsi.gov.uk/si/si2010/draft/pdf/ukdsi_9780111490495_en.pdf You will note that Chapters 22, 23 & 24 cover the Annual Contributions Limit which is £3,600 (at 2005 levels) after consultation this was reduced from a proposed level of £5,000. There are also proposed transfer restrictions.

Please remember the NEST scheme is designed for low to medium earners. Anyone on the minimum rates earning more than £45,000 would be hit by the contributions limit (or £50,000 if the employer did not pay on the first £5,000 which they are not obliged to do so.)

In reality an employee earning £12,000 will have annual contributions of £560p.a. (£12,000 - £5,000 x 8%). There is no margin here for a private firm to make money on this hence why NEST is being established to provide a place for employers to fulfil their duty. Many part time workers or lower paid employees will be way under a £50 per month contribution as suggested is needed by Jamesd to get such rates.

Jamesd wrote:

1. Hargreaves Lansdown SIPP, HSBC FTSE All-share tracker, 0.25% annual charge for the fund, minimum £50 a month contribution, open to anyone who can make pension contributions. They also offer workplace pension schemes.

Of course, if you have big money to put into a pension then there are better options but this is not the market.

Sunnysider wrote:

The truth is that the fees for Stakeholders were as low as they could go.

Dunstonh wrote:

WRONG. There are a number of personal pensions available today that are cheaper than stakeholder. Seeing as the Govt scheme will be using a tracker as its main fund (from the very limited choice that will be available) you can get those in the private sector at 0.25%. amc.

Dunstonh wrote:

Whilst the charges for the Govt scheme are still under consultation, the suggestion has been that a reduction in yield of around 0.3% will be likely.

Yes – for the reasons above personal pension fees can be lower but because of the administration Stakeholder schemes cannot meet those levels based on the typical contributions. NEST is the same. And for this reason for the market NEST will be the cheapest option.

A few other points. Fund choice is not going to be extensive; NEST is a low cost scheme for low to medium earners who in the main are new to pension saving. Have you read the investment strategy consultation? This was a well put together highly informative review. But as I understand there will be range of funds with different risk profiles.

A final point, for now(?!) is that there will be a lot of additional administration. For example, and employer is obliged to enrol “All Eligible Jobholders” not just those who want to be/have to be in the pension scheme as is currently the case. These members may then opt-out with refunds of contributions due. This increases the administration burden significantly and it will be interesting to see if the H-L and BGI will process all these applications/withdrawals for members contributing under £50 per month.

I am not anticipating ever being a member of the NEST scheme but can see the value in it and as mentioned in a previous post which someone kindly highlighted for me. There is no obligation for any employer to use this scheme. The legislation is what it is – more laid today as I’ve shown, but for employers who want to provide pensions there is nothing stopping them now, for members who want a pension there is nothing stopping getting one, but for those who don’t or won’t there needs to be something simple, easy to use and cheap for them to fall into and NEST seems to be shaping it a good offering to meet these requirements.

Sunnysider

marklv wrote: »

It's laughable that employers will only need to contrubute 3% of salary; I would have thought 10% was more suitable.

You would hope a good employer would, but remember these are employers who are currently choosing to pay nothing!

mealmond

Interesting thread to read.

My company does not pay into a scheme.

I just put money away each month into a Stocks & Shares ISA for now, if my company had to pay money into a pension scheme it would give me something to think about.

However, I am 43 this year, and I have only started saving in the last couple of years.

The Goverment Scheme was of interest but having read a few different articles, I am not so sure now.

ej8113

Just let me translate this for you, we cannot go on spending wastefully on the things we currently spend money on in the future because our pension commitment will be greater, therefore future spending will have to be adjusted - example GOING TO WAR NO! - HUGE PUBLIC SECTOR NO!- TOO MANY MP's NO! when laws are made in Europe - QUANGO's abolishing Quangos alone would pay off this countries huge deficit.

Deliberate Policies of Gordon Brown and Labour have reduced and will continue to reduce Home Ownership - a scheme (just like savings scheme) which those that could, entered freely into so that in retirement THEY HAD NO RENT TO PAY - HOME OWNERSHIP - otherwise their rent would have to be paid from their pensions (unlikely) or they'd be state dependant claiming Housing Benefit and Council Tax Benefit.

A modest rent from retirement until death based on today's prices will cost a single person at least £168,000 - that money now will have to be found from Housing Benefits as non-home owners become state dependants (if they have any sense)

Simple we've allowed our Government to move from a system where those that could helped themselves freeing resources for those that couldn't in to more and more relying on the state because of Bankers' Greed - Estate Agents Greed - Developers Greed and one man's belief that he'd abolished Boom and Bust

well done - pension time bomb - my ar**

jamesd

mealmond, best choice for now is probably to continue with S&S ISA until tax changes are introduced. Then you'll be able to get more tax rebate on the pension contributions if tax rates are increased. Choices like Hargreaves Lansdown and a wide range of other personal pensions work just like a S&S ISA for investing, so if you're doing the S&S IS route you already know how to use them.

The S&S ISA can't substitute for a pension unless you have so much money saved that you will never need means-tested benefits before you reach state retirement age, else you'd have to spend the savings to live on. Money in a pension is safe from that spending requirement until at least age 55.

One thing you can try to plan to do is have enough savings to live on until you reach 55, then enough to live on after taking pension income until you get to the state pension age.

ej8113 those would be nice arguments if it wasn't for you being wrong on the facts behind your claims. The number of homes in private ownership has been increasing and council house sales have continued under Labour. But those higher home ownership figures haven't been increasing as fast as the increase in households, notably single person households.

Owning your own home is a major factor in eliminating a future need for a government to pay the pension minimum income guarantee to you. It's a good thing for governments and tax payers long term to encourage home ownership.

£168,000 or any other amount can be expected to generate 6% a year of income from investments after allowing for inflation. That's £840 a month. The housing benefit (LHA) cap where I live is around £425 a month for a single person in a one bedroom flat and that's also what I've been paying in rent for the last few years. That takes about £85,000 in capital to generate the income assuming no decrease in capital value is desired. I can live comfortably on around £12,000 a year in income, which takes around £200,000 in investments to generate. Less is really needed because I can arrange to spend the capital and assume that I won't live to be older than say 110.

The pensions time bomb doesn't have much to do with these things. The key driver for that is the retirement of the baby boom generation that's just starting to really get under way. With a large retiring generation and a smaller following generation that will increase the number of retired people receiving the state pensions and benefits while reducing the number of tax payers who are paying for them out of taxes.