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Pension Reform: Personal Accounts & Other Important Changes

What's Happening?

In 2006, the UK government launched their plans for pension reform. They've now confirmed these plans and set out a more detailed timetable for the changes.

These pension reforms are going to result in millions of people seeing changes to their pension and retirement plans - so now is a good time to start learning about the changes, before they go live in a few years' time.

For a start, personal accounts, intended as a pension plan for lower to middling earners, have been rebranded as Nests. That stands for National Employment Savings Trust – see, they've got rid of that “pensions” word!

Personal accounts will oblige employers to contribute to plans for the very first time.

But don't hold your breath yet. They won't be introduced until 2012 at the earliest and as late as 2016 for smaller employers.

There are four main areas of change:

Why All The Changes?

Britain's population is getting older and older - meaning that fewer people are paying tax and National Insurance and more people are being paid state pensions.

On top of this, increasing numbers of Britain's workers have no pension arrangements at all.

The government estimates that at least 7 million people are not saving enough for their retirement and that 10 million people aged 22-65 are not participating in a pension scheme that includes an employer contribution of at least 3%.

It's these people that form the target for the majority of the changes that will be introduced - which are aimed at preventing people from being completely dependent on the state pension and benefits when they retire.

WARNING – Don't be taken in by pensions if you are on a low salary (or are unemployed for any reason) and you are unlikely ever to be a high earner. You might do better spending your money and relying on means tested benefits when you retire.

 

Who Will Be Affected By The Changes?

If you are already receiving a state pension, you won't be seriously affected by any of these changes.

If you are a woman and a bit younger, then you are going to be affected - like it or not - by the changes to the state pension retirement age for females as it rises from 2010 to 2020 from 60 to 65.

And anyone born after 1959 will be affected by further planned increases in the state retirement age. There is no guarantee, of course, that even the increases already planned will be the last word.

If you are not currently in a pension scheme to which your employer contributes, you will find yourself enrolled in the personal account pension scheme (now renamed NEST) from 2012, although you will be able to opt out.

Finally, anyone who is entitled to the State Second Pension (S2P, formerly SERPS) will see changes to the way this is calculated.

If you're thinking that it all sounds a bit confusing - you're right. There are a lot of changes and some of the rules behind them are pretty complex. The good news is that you don't really need to understand all the ins and outs of the new rules - you just need to know what effect the changes will have on you.

 

How Will You Be Affected By The Changes?

There are several parts to the pension system, all of which will be changing. To help make them all easier to understand, we've separated the changes out into four main sections - each of which is fairly self-contained:

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