The Personal Accounts pension scheme

James TreadwellQ. I run a small retail business with 15 employees and I’m unsure how the introduction of the Personal Accounts pension scheme will affect my company. Please can you explain what Personal Accounts are and how I should prepare?

A. The Personal Accounts scheme, due to be introduced in 2012, is intended to make millions of workers who do not pay into a pension start saving for their retirement. It will effectively be the first time that employers will be forced to make pension contributions on behalf of their staff.

Under the plans, employees aged over 22 and earning between £5,035 and £33,540 a year, (increasing with earnings inflation from 2007) will be automatically enrolled in a low-cost pension saving vehicle called a personal account. The government has set a minimum contribution for these qualifying schemes of eight per cent, of which the employee pays four per cent, the employer pays three per cent and an additional one per cent is given in tax relief.

While employees can opt out, for those choosing to contribute their four per cent and allowing for one per cent tax relief, this will mean you will have to contribute three per cent of their eligible earnings (basic salary, commissions, bonus and overtime).

The compulsory contributions for employers will be phased in over three years and will be limited. Those that do not currently offer employees a pension scheme, or those whose schemes do not pass a scheme exempt test, will have to act to comply with the new rules.

Contractual rights apart, it should be noted that these Personal Accounts are unlikely to have as much appeal to moderate and higher earners, or to employees looking for a greater degree of choice and higher contribution levels. Keeping or setting up your own qualifying scheme could be a more effective benefit and retention tool for a broader range of staff.

The changes will no doubt be widely communicated by the government in the run up to their introduction, but our advice is that businesses should begin planning now how they will fund the employee pension contributions when Personal Accounts are introduced. As well as budgeting, you also need to give some thought to how you will prepare operationally as you will need to offer an auto-enrolment facility for all members of staff which will need to be in place by the beginning of the 2012 tax year.

James Treadwell is partner at Moore and Smalley Chartered Accountants and Business Advisors