Kicking the short-term savings habit

Pension minister Steve Webb’s excitement last year over 2012 had less to do with the approaching London Olympics and was more about the onset of auto-enrolment In fact, the first employee will probably have been enrolled into a pension scheme before the Olympics opens at the end of July.

Auto-enrolment is an important policy that begins to redress the retirement savings gap, which continues to widen by the year. Final regulations dealing with certification of basic pay schemes and waiting periods, will be published by February.

Staying with the dead cert predictions, differences between male and female annuity rates will no longer be allowed after 21 December this year. This follows a European Court of Justice case brought by Belgian consumer group Test Achats last year. If pricing by gender is no longer permitted, will we begin to see annuity deals for occupations dominated by one sex such as construction?

Before all that happens, the lifetime allowance will have fallen to £1.5m with effect from 6 April this year. It is possible to keep hold of the current £1.8m allowance by claiming “fixed protection” on or before 5 April 2012, which is lost if “benefit accrual” occurs after that date.

Canny advisers will have noted that it is possible to earn more 60ths or 80ths in a defined benefit scheme as long as pay rises are kept to a minimum and inflation remains high. This means that some clients can have their cake and eat it - more accrual without losing their £1.8m protected lifetime allowance.

There is no shortage of pension policy issues under active discussion, which should develop further during the year.

Enhanced transfer values, particularly those encouraged by the use of cash incentives have come under the spotlight. Detractors say the offer of cash-in-hand clouds the employee’s better judgement, particularly if it is offered in advance of Christmas or the summer holidays. They have a point, although there are a minority of cases where the transfer value still makes sense irrespective of the accompanying cash.

Pension charges continue to feature strongly. There has been much debate already, some of which has been ill-informed.

Charges in the UK are among the lowest anywhere in the world. That value for money has been driven by a fiercely competitive market where customers – corporate and personal – use intermediaries to do their bidding.

The National Association of Pension Funds is the latest to enter the debate. The NAPF is suggesting greater transparency of charges, which sounds like a good thing but disclosure in pounds and pence would almost certainly lead to those with the smallest funds paying more. Care is therefore needed before jumping to what looks like a neat solution.

Small pots and vesting rules is another subject under the spotlight. The department for work and pensions is concerned that allowing people in work for less than two years to take a refund of pension contributions, defeats the aims of auto-enrolment. Stopping this practice may be contingent upon finding a way to move small pots away from occupational schemes, which have long claimed that the cost of administration for tiny funds is uneconomic.