Adrian Boulding, Director of Policy, NOW: Pensions
Earlier this week the Department for Work and Pensions announced that since the introduction of automatic enrolment in 2012, 10 million people have been auto enrolled.
Hitting 10 million auto enrolled is a huge milestone and it’s certainly a cause for celebration. But, with minimum contributions rising in April marking the official end of the roll out of auto enrolment, there’s a danger that the government will think that it’s job’s done. The reality is that we still have a long way to go. Here’s why we should put the champagne on ice.
12 million under-saving
Despite the success of the policy, using the savings adequacy measure introduced by the Pensions Commission, there are still around 12 million individuals under-saving for their retirement who make up 38% of the working age population.
Of these 12 million, the vast majority of those individuals who are under-saving – approaching 10.4 million (87%) – earn more than £25,000 a year.
8% doesn’t mean 8%
One of the major causes of under-saving is the way auto enrolment minimum contributions are calculated with the first £6,032 of a person’s income not included in calculating their pension contribution. In April, when auto enrolment minimum contributions increase to 8% this will increase to the first £6,136.
For low earners, this means a significant proportion of their earnings won’t be counted towards their pension contributions. For example, from April 2019, if an employee earns £20,000 their qualifying earnings would only be £13,864. For somebody earning £10,000 only £3,864 of their earnings would be pensionable.
This affects all workers, but the low paid are particularly disadvantaged as the table below shows:
|Occupation||Average Salary based on ONS data||Annual pension contribution based on qualifying earnings||Annual contribution on every pound of earnings|
|Cleaners||£ 14,164.00||£ 642.24||£ 1,133.12|
|Nursery Nurses||£ 14,305.00||£ 653.52||£ 1,144.40|
|Cooks||£ 15,461.00||£ 746.00||£ 1,236.88|
|Receptionists||£ 16,258.00||£ 809.76||£ 1,300.64|
|PA and Secretaries||£ 24,508.00||£ 1,469.76||£ 1,960.64|
|Bricklayers||£ 24,806.00||£ 1,493.60||£ 1,984.48|
|Vehicle Body Builders and Repairers||£ 24,821.00||£ 1,494.80||£ 1,985.68|
In the 2017 auto enrolment review, the government committed to changing the law so that auto enrolment calculations on every pound of earnings by the mid-2020s but this month they chose to increase the lower earnings band from £6,032 to £6,136. It’s almost as though they’ve found the right station but have got on a train going in the opposite direction. The lower earnings band needs to go, and it needs to go soon.
Not everyone is receiving tax relief on their pension contributions
As a result of a wrinkle in the way tax relief is collected, some lower earners are missing out on a government top up to their pension savings through no fault of their own.
This is due to the fact that there are two ways pension providers can collect tax relief – under the Net Pay Arrangement (NPA) or through the Relief at Source (RAS) system. The vast majority of occupational pension schemes operate under the NPA while traditionally contract-based schemes have operated on a RAS basis.
In relief at source arrangements, the pension contribution is deducted after tax has been taken off and HMRC later sends the tax relief, at the basic rate of 20%, to the pension scheme. Everyone receives this contribution meaning that even those who don’t earn enough to pay income tax still receive a 20% top up whereas those in a net pay scheme do not.
HMRC estimates that the net pay anomaly currently affects the living standards of more than a million very low-income savers, of which 890,000 are women, as it reduces their take home pay.
Somebody earning £12,500pa, paying auto enrolment minimum contributions of 5%, based on qualifying earnings, will be missing out on £63.64 in tax year 2019/20. That could be the cost of their child’s school uniform for a parent working part-time to balance childcare needs.
NOW: Pensions is the only net pay scheme to offer to top up the pension pots of its non-income tax paying members – for information on how to make a claim, click here. But, this isn’t a long-term solution.
We are calling on the Government to act urgently to ensure that all low earners receive tax relief regardless of which type of scheme they are in.
The achievements of auto enrolment are undeniable – 84% of staff are now saving into a workplace pension. The culture of saving is changing with putting aside money for the future now the ‘normal’ thing to do with opt out rates encouragingly low, particularly amongst young people.
But, we still have a long way to go to make sure auto enrolled savers get the retirement they deserve.