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Personal Accounts Savings Scheme

Volume 461: debated on Thursday 21 June 2007

To ask the Secretary of State for Work and Pensions if he will assess the impact of a contribution cap of (a) £3,000 and (b) £5,000 on the proposed personal accounts savings scheme if the upper earnings limit for contributions were increased to £43,000. (140362)

On 14 June 2007, the Government published their summary of responses to the White Paper Personal accounts: a new way to save consultation exercise. That document signalled our intention to establish the personal accounts earning band in line with the primary threshold and upper earnings limit from 2006-07 and to uprate these thresholds annually in line with average earnings. This means that the personal accounts earning band will not increase to the new level of the upper earnings limit that was announced in this year’s Budget.

We also announced that the personal accounts annual contribution limit would be set at a level of £3,600 in 2005 earnings terms, and uprated according to earnings to 2012 and beyond. Such a figure will ensure that personal accounts will stay focused on the target market, complementing rather than competing with existing provision, while still providing moderate to low earners with sufficient room to meet benchmark replacement rates.

To ask the Secretary of State for Work and Pensions what estimate he has made of the additional cost to employers of the proposed personal accounts savings scheme if the upper earnings limit for contributions to the proposed personal accounts scheme were increased to £43,000. (140363)

As the Government’s response to their consultation on the White Paper Personal Accounts: a new way to save, sets out we will not increase the personal accounts earnings band upper threshold to reflect the increases in the tax and national insurance thresholds announced in the Budget. An increase in the upper threshold to £43,000 would have cost employers an additional £150 to £200 million a year.

To ask the Secretary of State for Work and Pensions in what percentage of cases the median earner detailed on pages 113 and 114 of the regulatory impact assessment to Personal Accounts: A New Way to Save would have a replacement rate in excess of 100 per cent. if he saved (a) £3,000 each year and (b) £5,000 each year, according to the Department’s stochastic modelling. (141530)

Estimates of pension income are heavily driven by a number of assumptions, such as the asset allocation in a particular fund choice, the age at which the individual starts saving and the choice of annuity. It is therefore not possible to say with absolute certainty with which amount of annual savings an individual would achieve a replacement rate of above 100 per cent.

However, both under a contribution limit of £3,000 and £5,000 a median earner with a full working life is likely to be able to achieve an adequate pension income as defined by a replacement rate. This would require additional voluntary savings above the default contribution. Clearly, the higher an individual’s contributions, the more likely they are to achieve a particular retirement income.

On 14 June, 2007, the Government published their summary of responses to the White Paper “Personal Accounts: A New Way to Save” consultation exercise. This document contained further analysis on the personal accounts contribution limit and concluded that an annual limit of £3,600 would be an appropriate figure. Such a figure will ensure that personal accounts will stay focused on the target market, complementing rather than competing with existing provision, while still providing moderate to low earners with sufficient room to meet benchmark replacement rates.

To ask the Secretary of State for Work and Pensions what replacement rate the median earner described on pages 113 and 114 of the Regulatory Impact Assessment to Personal Accounts: A New Way to Save would achieve if investments performed in line with central assumptions each year and if his total savings were (a) £3,000 each year and (b) £5,000 each year. (141529)

If investment returns were in line with the estimated average of a 3.5 per cent. real rate of return in each year, a median earner, who contributed up to the contribution limit in each year, would, in principle, be able to reach (a) around a two thirds per cent. replacement rate with a £3,000 contribution limit and (b) around an 85 to 90 per cent. replacement rate with a £5,000 contribution limit. The benchmark replacement rate for a median earner is around two thirds which is in principle attainable with a £3,000 contribution limit.

However, these replacement rates are based on the assumption of a full working life (age 21 to 68) and hence a high number of years of saving (46 years). Some people in personal accounts are likely to start saving at a later age than 21 or have caring breaks in their working life and thus need a somewhat higher degree of flexibility of saving to reach their benchmark replacement rates.

On 14 June, 2007, the Government published their summary of responses to the White Paper Personal accounts: a new way to save consultation exercise. This document contained further analysis on the personal accounts contribution limit and concluded that an annual limit of £3,600 would be an appropriate figure. Such a figure will ensure that Personal Accounts will stay focused on the target market, complementing rather than competing with existing provision, while still providing moderate to low earners with sufficient room to meet benchmark replacement rates.