For immediate release: Monday 24 November 2014
NOW: Pensions call for removal of “qualifying earnings” as savers miss out on up to £90,500 of pension savings
- Qualifying earnings could be eroding savers’ pension pots by as much as £90,500*
- 8% contribution becomes just 3.4% for low earners due to the way auto enrolment contributions are calculated
- Maximum amount any saver can receive is 6.9%
NOW: Pensions is today calling for the removal of qualifying earnings and for pension contributions under auto enrolment to be based on total salary as figures from the workplace pensions provider reveal that savers could be missing out on as much as £90,500 as a result of the way contributions are calculated.
Workers who are automatically enrolled make phased contributions as outlined in the table below.
|Date||Employer minimum contribution||Total minimum contribution|
|Employer’s staging date to 30 September 2017||1%||2%|
|1 October 2017 to 30 September 2018||2%||5%|
|1 October 2018 onwards||3%||8%|
But, the legislation states that contributions only have to be made on qualifying earnings. This is the name given to a band of earnings used to calculate contributions for automatic enrolment.
For the 2014/15 tax year this is set by the DWP between £5,772 and £41,865 a year. This means that the first £5,772 of an employee’s earnings isn’t included in the auto enrolment calculation. For example, if a worker earns £20,000 their qualifying earnings would be £14,228. The maximum amount contributions can be based on is £36,093 (£41,865 minus £5,772) for the 2014/15 tax year.
For somebody earning £27,000 a year, over 40 years of saving, basing auto enrolment contributions on qualifying earnings rather than total salary could mean that they miss out on as much as £90,549 of contributions and investment growth.
The effect of qualifying earnings on auto enrolment contributions based on an 8% total contribution
|Annual salary||Auto enrolment contribution taking into account the impact of qualifying earnings|
Morten Nilsson, CEO of NOW: Pensions said: “Qualifying earnings has a corrosive effect on pension pots and misleads savers.
“The 8% contribution rate is regularly quoted but the reality is nobody actually gets a full 8% – the most anyone gets is 6.9% if they are exactly at the top of the earnings band, with somebody earning £10,000 only receiving a total contribution of 3.4% which is woefully inadequate.
“Removing band earnings and basing contributions on all salary would help boost savings for all and would remove a great deal of the administrative complexity for employers.”
Tim Sharp, Pensions Policy Officer at the Trades Union Congress, said: “The roll-out of auto enrolment has been a great success so far. But it is important that we iron out flaws in the system early on.
“The use of a lower earnings band discriminates against the low paid who miss out on valuable employer contributions.
“For auto enrolment to live up to its potential to provide low and middle earners with good incomes in retirement, we need minimum contributions to go up in stages beyond current plans. We think there is a strong case for employer contributions to be paid on every pound of earnings.”
– Ends –
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Notes for editors:
*Based on 40 years of saving and assumes 4% per annum salary growth and 5% investment growth based on an 8% contribution and a salary of £27,000 (national average).
NOW: Pensions www.nowpensions.com
NOW: Pensions is an independent, multi-employer trust serving thousands of employers and hundreds of thousands of employees from a wide range of sectors.
A subsidiary of one of Europe’s largest pension funds, Danish pension scheme ATP, NOW: Pensions offers a simple and cost effective workplace pension solution direct to employers and via advisers and the payroll sector.
In April 2013, NOW: Pensions became the first master trust to attain the NAPF’s new PQM Ready Standard. The benchmark shows employers that NOW: Pensions is a well governed pension scheme with low charges and good member communications.
The NOW: Pension Trustee Directors, whose role is to safeguard the interests of members, comprises well-known industry figures with different areas of expertise:
- Jocelyn Blackwell, founding partner Dunnett Shaw
- Christopher Daykin, former Government Actuary
- John Monks, member of House of Lords and former General Secretary of ETUC and TUC
- Win Robbins, former Head of European Fixed Income at Barclays Global Investors
- Nigel Waterson, former Shadow Pensions Minister
Charges are just £1.50 per month administration charge (reduced administration charge of £0.30 – £1.00 to be applied during auto enrolment phasing for lower earners) plus a 0.3% annual product investment management charge, with no hidden charges.