Personal Accounts & State Pension Top-Up

The Pensions Act 2007 announced important changes to help up to 10 million people with low to moderate earnings build up private savings - with contributions coming from their employers and from the State.

From 2012 - if you agree to save a minimum of 4% each year on a "band" of your gross earnings between approximately £5,000 and £33,500 - your savings will go into what's called a Personal Account. Your Employer will contribute a minimum of 3% to your account and the government will then add a further 1% in the form of Tax Relief.

In simple terms this means if you save about £22 a week for example - your employer adds another £16 or so - which is "topped-up" with government Tax Relief to make a total of around £44 going into your Personal Account every week. This makes the new Personal Accounts similar to Stakeholder Personal Pensions which also qualify for government tax relief - although the maximum that can go into a Personal Account is currently "capped" at £3,600 a year or £69 a week.

Automatic Enrolment

When Personal Accounts become available in 2012 - all eligible workers will be automatically enrolled into either a suitable work-based pension scheme - or into a Personal Account - unless they choose to "opt-out". If your employer already has a workplace pension scheme that's the equivalent of - or better than a Personal Account - you may prefer to join that scheme instead - assuming you're not already in it. Either way the choice is yours - and if you're already a member of your employer's scheme you won't be offered or need a Personal Account anyway.

Should I Have a Personal Account?

That's a difficult one to answer. The government is concerned that people's "inertia" often stops them saving for their retirement - so that's why "automatic-enrolment" is being used. Whilst saving in a Personal Account won't actually be compulsory - you generally shouldn't opt-out of joining unless you're absolutely sure you can't afford it!

Another important thing to remember is that it's not a "good thing" to wait for the new Personal Accounts to arrive in 2012 before you start some tax-boosted pension saving. Most financial advisers and commentators agree that a "delayed-start" to pensions saving will cost you dearly - and one large financial group has said that a 30 year old can "lose-out" to the tune of around £116,000 by not starting a Personal Account-like saving scheme before 2012. (see Stakeholder Features)

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