Pensions: ‘Automatic enrolment will transform the big picture’

IN THE pensions arena, automatic enrolment is the main event. Starting from October 2012, eventually all UK employers will have to enrol every employee who meets basic eligibility criteria into a pension plan, whether they want to join or not.

(Staff can, however, “opt-out” once they’ve been enrolled.)

When considering automatic enrolment it is always worth remembering that the government’s objective is to get people saving for their own retirement. So while we still await some of the details, the high-level picture is clear. Automatic enrolment will happen and employers will be in the hot seat to deliver it.

Given the desire to improve pension savings, it will be interesting to see if the government will retain higher rate tax relief on pension savings. It will be a difficult balancing act. On the one hand it must certainly be tempting for them to retain this money, perhaps using it to reduce the budget deficit. On the other, it will make pensions much less attractive to an increasing number of potential savers.

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Many individuals hold more than one pension plan, and Steve Webb, the Pensions Minister, is looking at ways in which “small pension pots” can be amalgamated into larger, more efficient arrangements. This is good news. However, the logic is not restricted to small pensions and the industry is also looking at ways to make transferring assets between pension plans quicker and easier.

Another major theme for 2012 is the increasing number of baby boomers arriving at retirement. Annuity rates remain low and the income that can be taken from a pension plan has consequently been squeezed. This creates a massive short-term problem for some people. But it’s not necessarily all bad. Restricting the amount of income that can be taken means it is likely to last longer.

Thanks to improved mortality, the soon-to-be-pensioners are likely to spend longer in retirement than any previous generation. During their retirement, it’s quite likely that their income needs will change, and greater flexibility is to be welcomed.

Pension charges will undoubtedly attract headlines again, as they did in 2011. It is absolutely right that pension charges should be fair and that clients should understand what they are paying for. But it’s important that the negative headlines should not become an excuse for people to avoid saving at all. Those who don’t like pensions should still plan and almost certainly should still save somewhere.

Fiona Tait is business development manager at Scottish Life