Personal Accounts: Section 6: What will this mean for the financial services industry?

100. Personal accounts should complement, rather than compete with, existing good-quality pension provision. There will be no public policy benefit if personal accounts result only in existing pension saving being moved from one savings vehicle to another.
101. Personal accounts are designed to serve up to 10 million people who do not have access to, or are not participating in, a pension scheme offering at least 3 per cent employer contributions. These reforms will effectively open up a new segment of the market to the financial services industry and will be a significant new business opportunity:

     • Firms with relevant administrative expertise will have the opportunity to manage the personal accounts scheme for potentially 6 to 10 million customers.
     • It is estimated that personal accounts will increase the level of private pension savings by an estimated £8 billion a year, of which approximately £4 to £5 billion will be new saving. Fund managers will compete to invest the £150 billion which is expected to accumulate in personal accounts in the long term.

102. In addition, we have taken steps to limit the impact on the successful parts of the market to ensure personal accounts complement, rather than replace, existing pension provision.

     No transfers in or out of personal accounts

103. The Government proposes that there should be no transfers into or out of personal accounts from or to existing pension schemes. There are clear advantages in this approach:

     • Adverse impact on the existing market would be minimised. The start-up costs incurred when establishing pension products may not be recovered if funds are transferred into personal accounts.
     • Administrative cost and complexity associated with transfers, such as valuing pension rights, would be avoided.
     • There would be no need for advice from financial advisers to compare the relative advantages of the existing scheme and personal accounts, the cost of which individuals themselves would have to bear.
     • It would send an important psychological signal to employers and individuals that personal accounts are targeted at a specific market and this could be an important safeguard against the ‘levelling down’ of existing provision.

     Annual limit on contributions

104. The Pensions Commission recommended that there should be an annual limit on the total value of contributions into a personal account. They suggested around £3,000 a year, which was twice the total minimum contribution for a median earner.
105. Further analysis indicates that the £3,000 contribution limit would be too restrictive to allow a range of individuals within the target group sufficient room to make additional contributions and reach higher replacement rates, which may reflect individual retirement aspirations. This analysis suggests that an appropriate limit, at least in the first years of personal accounts, would be £5,000. Chapter 7 provides more details of this analysis.
106. We propose to review both the limit and transfer policy in 2020, when the market impacts of the 2012 reforms are better understood, to ensure these policies are operating effectively.
107. The Government believes that there is a strong case for a higher contribution limit in the first year of personal accounts. A £10,000 limit in the first year of personal accounts would allow individuals to deposit accumulated non-pension savings in personal accounts. This additional allowance for the first year of personal accounts will allow individuals who currently do not have access to good-quality employer-sponsored pension provision to save in other products before 2012 and move them to personal accounts.