Auto enrolment has got off to a flying start for those earning enough to be included within it. But concerns are growing that an increasing number of the low-paid workers auto enrolment was designed to help are being excluded from the retirement savings revolution.
The problem stems from the definition of who is eligible to be automatically enrolled. The original plan was that anyone earning more than the threshold for National Insurance, currently £5,772, would be auto enrolled into their employer’s workplace pension. But in 2012 the government decided only those earning enough to have to pay income tax should be included.
At the time, the income tax threshold stood at £7,454, meaning a relatively small number of people were excluded from auto enrolment by the change in policy. But since then the income tax threshold has shot up to £10,000. As a consequence, the number of low earners cut out of auto enrolment has soared.
This change in eligibility criteria means around 1.5 million of the lowest paid, least pensioned workers in the country have been excluded from the positive benefits of saving in a workplace pension through auto enrolment. The coalition’s policy of taking low earners out of eligibility for income tax has been great for their take-home pay, but it has stopped their pension saving dead in its tracks.
Women have been particularly badly hit by the eligibility rules, at a time when they are already coping with faster increases in state pension age than men. Women juggling more than one job that on its own would leave them below the income tax threshold are being shut out of the system. They pay income tax if their total salary exceeds the £10,000 limit, but they only benefit from auto-enrolment if each job they have pays more than this.
So while a woman with two jobs paying £9,000 a year is taxed on earnings of £18,000, she is excluded from auto-enrolment altogether.
Some have argued that it is not worth automatically enrolling these low earners into pensions because the amounts they will save each month will be tiny. At NOW: Pensions we believe saving something is better than nothing, and with time, what seems like low levels of contributions can build up into a meaningful sum of money.
A worker earning just below the £10,000 auto enrolment threshold is missing out on pension contributions of £338 a year.
And even if their salary never increases in real terms over their working life, they could build up a pot of around £19,000. And let’s not forget that someone juggling two jobs just below the auto enrolment threshold would build up double that figure.
At the moment, the vast majority of employers have chosen to base contributions on auto enrolment minimums which are based on a band of earnings set by the DWP between £5,772 and £41,865. For low earners, this means contributions are only payable on earnings above £5,772. So someone earning £10,000 only contributes on the difference between the two figures, meaning a contribution of just £7 a week. We believe a better solution would be to remove the band earnings approach and base contributions on all salary. This would boost the savings of the very lowest earners, more than doubling their contributions, without significant increases in cost for employers.
Aligning eligibility for auto enrolment to the income tax threshold rather than National Insurance has been detrimental for the retirement finances of 1.5 million low paid and part-time workers. It’s now time for a rethink that opens the door to more of the low earners for whom auto enrolment was created.