IT IS often said that the UK faces a "demographic time bomb". In reality, it will break like a biblical flood, inundating our public finances. Increasing longevity and falling birth rates mean those at or beyond retirement age already outnumber those below working age. It won't be much longer before pensioners outnumber those in work.
The strain that this trend will eventually put on the UK's finances is immense and the government is rightly concerned. It is particularly concerned about the estimated five million individuals of working age who have no private pension provision, an
d a further two million who are not saving enough. It is estimated that ten million people do not receive any pension contribution from their employer.
The government has had a go at encouraging more of us to save towards our old age before. In 2001 it introduced stakeholder pensions – low-cost personal pensions which employers were obliged to set up and offer their employees. However, neither employers nor their employees were obliged to contribute.
The predictable result was that thousands of designated stakeholder schemes never received a penny. While those already saving via personal pensions could benefit from a lower-cost version, what stakeholder pensions failed to do was to address the "can't save, won't save" mentality of so many workers.
Only after this abject failure was the notion of compulsion considered. The political risks inevitably accompanying such a bold and radical move as compelling people to save for retirement evidently proved too great and the government pulled up well short. Instead, it proposes to compel all employers to automatically enrol employees aged 22 and over into a qualifying workplace pension scheme (QWPS) from April 2012, and pay a minimum amount into the scheme for the employees.
Many existing employer-sponsored pension schemes will meet the qualification requirements for QWPS, but where this is not the case employers will be required to enrol their employees into a massive occupational scheme that the government intends to create, to be known as personal accounts. This will be an ultra-low-cost, trust-based, money purchase scheme.
The minimum contributions will eventually be 8 per cent of qualifying earnings, made up of 3 per cent from the employer and 5 per cent from the employee. Contributions will be phased in, up to this level, over three years from 2012.
Under the qualifying earnings rules, the first £5,035 of annual earnings is not taken into account, nor are earnings above £33,540. This means that someone earning £33,540 would actually have total contributions (both employer and employee elements) equating to 6.8 per cent of their earnings. Someone on £18,000 will have a total pension contribution of about 5.8 per cent; at £10,000 a year it will be just under 4 per cent, while someone on £6,000 will receive only 1.3 per cent.
The maximum employer element (for those on £33,540+) is £855, around 2.5 per cent of earnings up to this level. Meanwhile, it was announced recently that the MPs' pension scheme needs to increase the taxpayers' contribution to 31.6 per cent of MPs' pay from April this year.
• Paul Lothian is a director of Verus Chartered Financial Planners in Dundee.
