PPI PENSIONS POLICY INSTITUTE Are Personal Accounts suitable for - - PowerPoint PPT Presentation
PPI PENSIONS POLICY INSTITUTE Are Personal Accounts suitable for all? Niki Cleal and Adam Steventon Pensions Policy Institute Supporting members event 29 November 2006 www.pensionspolicyinstitute.org.uk This presentation is intended as a
Niki Cleal and Adam Steventon Pensions Policy Institute Supporting members event 29 November 2006 www.pensionspolicyinstitute.org.uk
This presentation is intended as a contribution to the policy debate on Personal Accounts. Nothing in this presentation should be used by individuals or their advisors as the basis for saving and investment decisions.
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Are Personal Accounts suitable for all?
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Are Personal Accounts suitable for all?
Accounts, state pensions, the tax system and means-tested benefits in detail
may be suitable and those for whom they may not be suitable
analysed
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Many factors affect the value
£2.73 £1.00
Individual contribution Tax relief Employer contribution Investment returns Charges Income tax Pension Credit Council Tax Benefit + Housing Benefit Total
Value of saving in a Personal Account for a median- earning man with a full NI record aged 25 in 2012 for each £1 of contributions
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Returns from Personal Accounts could be much higher than from Stakeholder Pensions
5.9% 0.4% 1.6% 3.9%
Stakeholder pensions (AMC of 1.5% for 10 years, 1% thereafter) Impact of an employer contribution Impact of low charges (0.5% AMC) Personal Accounts
Internal rate of return from saving for a median-earning man with a full NI record aged 25 in 2012
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Personal Accounts is the right thing for all
so risk groups used
products
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0% 1% 2% 3% 4% 5% 6% 7%
Three risk-categories are used, based on the IRR
plus Investment returns on TR + E’er plus Employer contribution plus Tax relief plus Investment returns Gets back own contributions + inflation
High-risk Medium-risk
Partial Partial
Low-risk
5.5% = investment returns 2.5% = inflation
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Individuals in their twenties in 2012 with full working histories could be in the low-risk category
5.9% 5.9% 5.8% 6.0% 6.8%
0% 1% 2% 3% 4% 5% 6% 7%
1st 3rd Median 7th 9th
Estimated IRR for men with full NI records and no retirement saving other than Personal Accounts, aged 25 in 2012, by decile of the male earnings distribution
Low risk Medium risk High risk
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Returns can be lower for people with lower earnings and career breaks
4.8% 5.8% 5.9% 4.8%
0% 1% 2% 3% 4% 5% 6% 7%
Median-earning man, full NI record Low-earning man, full NI record Low-earning man, intermittent unemployment Low-earning woman, caring breaks
Estimated IRR for men and women aged 25 in 2012, for different levels of earnings and work histories
Low risk Medium risk High risk
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Personal Account returns can be higher for people who have other forms of saving
6.0% 4.8%
0% 1% 2% 3% 4% 5% 6% 7%
Low-earning woman, caring breaks Low-earning woman, caring breaks, £35,000 of saving on top of Personal Accounts
Estimated IRR for men and women aged 25 in 2012, for different levels of saving on top of Personal Accounts
Low risk Medium risk High risk
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Returns from Personal Accounts can be lower for today’s older workers
4.3% 5.8% 5.9%
0% 1% 2% 3% 4% 5% 6% 7%
25 40 55
Estimated IRR for median-earning men with full NI records of different ages in 2012, with no retirement saving
Low risk Medium risk High risk
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Self-employment can lead to lower returns
4.3% 4.7% 5.9%
0% 1% 2% 3% 4% 5% 6% 7%
Employed and saving in a Personal Account throughout working life Not voluntarily
Accounts after age 40 Voluntarily opting-in to Personal Accounts from age 40
Estimated IRR for median-earning men with full NI records and aged 25 in 2012, with no retirement saving
Low risk Medium risk High risk
Self-employed from age 40
Mainly effect of S2P Effect of no 3% e’er cbn
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Renting in retirement can lead to very low returns
0.2% 5.9%
0% 1% 2% 3% 4% 5% 6% 7%
Owns his own home in retirement Rents in retirement
Estimated IRR for median-earning men with full NI records and aged 25 in 2012, with no retirement saving
Low risk Medium risk High risk
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histories
broken working histories (whether because of caring breaks
and full working histories
Personal Accounts while employed, and then later become self-employed
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What other factors could affect suitability?
married in retirement
might otherwise face low retirement incomes
are historically high
preferences on current expenditure and saving
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does not necessarily mean that individuals should not be auto-enrolled
supplied to help decision making
time
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everything sufficiently?
solutions (e.g. not auto-enrolling some groups)?
be changed?