The forthcoming introduction of personal accounts (they start in less than 30 months) is probably not something that keeps you awake at night. But it is something that is likely to affect a large number of us.

So I thought this week might be a good time to take a look at the basics and who will be hit – a word chosen carefully, because for many employers and employees, this is far from good news.

How can pensions be bad?
I firmly believe in the importance of pension provision. Relying on the basic state pension is a non-starter, especially with the age at which is starts being ‘rolled back’ for women from 60 to 65 over the next decade and for everyone from 65 to 68, starting shortly thereafter (even earlier, according to some suggestions).

But if personal pensions are essential, why complain about this new form of compulsory pension saving?

Where do we start?
Firstly, Personal Accounts will become mandatory for employers who do not offer an acceptable workplace pension scheme to all employees. Employers already offering a pension scheme can seek to bring it ‘up to speed’, in which case they should be OK. But most small employers will have to opt-in just about everyone working more than 20 hours a week. Contributions will be 8% of earnings between a lower and upper limit (in today's terms between £5,035 and £33,540 a year). The employer must contribute a minimum of 3% of this, with the employee putting in 4% and the government 1%.

The problem with this is that the Pension Credit system is means tested; so many lower earners will find that their eventual benefits are eroded just because they have a Personal Account, when they come to retire. Of course, employees (unlike their bosses) can opt-out. But they will be automatically opted back in every three years, unless they remember to opt-put again … and again … You get the picture.

How does this affect higher earners?
Most people on higher earnings will have some form of pension provision already. However, unless they are members of a ‘qualifying’ workplace pension scheme, they will be opted in, unless they opt out.

For most, this will be relatively straightforward, and even if they forget to opt out, they will not have too much of a problem. But anyone who applied for enhanced protection between 6th April 2006 and 5th April 2009 cannot make any additional pension contribution, or the protection is lost. Forever. So the potential cost of inadvertently failing to opt-out in time could be devastating. And even if there were to be some exemption for such cases, the cost-effectiveness of this contribution will be minimal.

When did a state pension plan ever work?
Having seen graduated pensions, and SERPS come and go, together with many other government-inspired schemes and IT debacles, it is difficult to have any confidence in its ability to get this right and offer cost effective and reliable administration and secure (albeit out-sourced) investment strategies.

It would be far better if the government abandoned this proposal (along with Home Information Packs and Identity Cards) and simply made it more attractive for individuals to save for retirement by simplifying the rules and offering real tax incentives – not slashing tax relief for very high earners.

As ever, when it comes to looking after our retirement planning and investments, vigilance and professional advice are essential. If you are wondering what to do contact Robert Bruce Associates for individual assistance.

NOTHING IN THIS ARTICLE SHOULD BE SEEN AS GIVING INDIVIDUAL FINANCIAL ADVICE.