Pensions - Personal Accounts a panacea?

A new report from Scottish Widows concludes that the Government will have many hurdles to overcome if it wishes to avoid a pensions crisis through the introduction of Personal Accounts, as suggested in the Pensions White Paper.

While there is widespread public support for many of the principles behind Personal Accounts, there is considerable resistance to starting to save earlier or working longer. Also, 34% of those polled in the report, say they can't afford to save anything for their retirement, leading to the very real possibility of millions of Brits opting out of the new savings scheme when it is introduced.

65% of employers are expected to retain current contributions for existing staff, but will offer new employees contributions more in line with the Personal Accounts minimum 3% employer contributions and 5% employee contributions, including tax relief.

Although Personal Accounts will mean that all people in full time employment will be provided with a pension with the option to decide not to take advantage of the savings scheme if they so wish the report shows that women and the self-employed are still likely to lose out.

According to data from the Pensions Policy Institute PPI, an employed man on median earnings who contributes continuously from age 22 until he retires at age 65, could receive £74 a week in real earnings-related terms from a Personal Account at age 68. The equivalent pension for a woman is just £51 a week 69% of what the man receives, with the difference arising from lower average earnings and more expensive annuity rates. Women are also much more likely than men to take career breaks, or work part-time, which further hits potential retirement income.

Meanwhile, a self-employed man on median earnings might receive only £46 a week from a Personal Account in real terms, even if he contributes at the same rate as an employed man continuously from age 22 until he retires at age 65. To make matters worse, the effect of changes to means-testing could mean that he is only £12 a week better off at age 68 than if he had saved nothing at all, and only £2 a week by age 78. This is because changes to the Savings Credit mean that those who are not entitled to State Second Pension will lose £1 of means-tested benefit for every £1 of personal income on a significant part of their pension.

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2006-11-13 11:08:04 © Moneyextra.com