The blueprint for pensions saving for millions of future employees was unveiled by the government this week.
It is expected to see up to 10m people putting £4bn-£5bn a year into new personal accounts in a move that will help narrow the UK’s pension saving gap.
The new personal accounts, which go live in 2012, will not be compulsory. But employees who are not already enrolled into a better pension scheme run by their employer will automatically be enrolled into the new vehicles, although they will retain the right to opt out.
But the scheme has already attracted criticism from many, including product providers and MPs who argue that, when combined with the government’s complicated system of means-tested benefits, many lower-paid workers risk being little better off from making contributions to the new personal accounts.
Frank Field, a former Labour welfare reform minister, warned that the scheme posed “the biggest risk of the mis-selling of pensions for a quarter of a century”.
Under the proposals announced this week, money paid into a personal account will automatically be channelled into a default fund, likely to be a low-cost fund tracking the stock
market. This will also include a “lifestyling” function, so that this money will be shifted into less volatile investments such as cash or bond funds as the employee approaches retirement.
There will be further fund choices, including most likely funds run by well-known industry figures, although the charges on these funds will almost definitely be higher. Ethical and social funds are also likely to be made available to investors.
The government still believes that its centrally-administered model will allow fund charges on its default option to be just 0.3 per cent annually, which would make these funds significantly cheaper than other mainstream pension options.
Under the proposals, transfers in and out of the scheme will not be allowed at least up until 2020, when this restriction will be reviewed.
Employers will be required to put in a minimum 3 per cent contribution on earnings between £5,000 and £33,000 a year with employees contributing 4 per cent and
tax reliefs effectively adding a further 1 per cent benefit.