Savers short-changed £40,000 due to quirk in the auto enrolment calculation

FOR IMMEDIATE RELEASE 1st April 2019 

New analysis by NOW: Pensions shows that savers will be £40,000 worse off in retirement unless changes are made to the way auto enrolment minimum contributions are calculated. This month minimum contributions will rise from 5% to 8%, but, in reality, no auto enrolled saver paying minimum contributions will be saving the full 8% because of the way contributions are calculated.

On 6 April, the lower qualifying earnings threshold will rise by £104, meaning employees won’t receive auto enrolment minimum contributions on the first £6,136 of their earnings each year. Earnings over £50,000 won’t be included either.

For somebody earning £25,000 a year, this means only £18,864 of their salary is counted when calculating their auto enrolment contribution.

If minimum contributions remain at 8% of qualifying earnings, the average 25 year old male worker would see £125 per month (£1,497 per year) added to their pension pot, instead of £166 per month (£1,988 per year). The average 25 year old female worker would see just £111 per month (£1,342 per year) added to their pension pot compared to £153 per month (£1,833 per year).

Over 40 years of saving, this would wipe £40,200 from the average pension as the table below, based on a 25 year old earning average salary* for 40 years, illustrates.

Male Female
8% qualifying earnings  £ 165,082.69  £ 134,164.95
8% all earnings  £ 205,288.97  £ 174,371.23


Adrian Boulding, Policy Director of NOW: Pensions, comments:
“Auto enrolment is helping 10 million people save for their future, which is a huge step forward. However, the way contributions are calculated is leaving many short changed.

“The rules are especially unfair for part-time workers who have the same £6,136 taken off their earnings as their full-time colleagues.

“The government has an opportunity to give auto enrolled savings a shot in the arm by changing the way contributions are calculated. This is a measure we hope to see included in the Pensions Bill expected in the Spring.”

–     ENDS     –

For further information:

Amy Mankelow
NOW: Pensions
Tel: 0203 948 9234
amy.mankelow@nowpensions.com

Fenella Cuthbert
Cicero Group
Tel: 0207 947 5327
fenella.cuthbert@cicero-group.com

Notes to editors

The effect of qualifying earnings on auto enrolment contributions based on an 8% total contribution:

Job title Annual salary Actual contribution
Part time workers, shop staff, waiters / waitresses £10,000 3.1%
Call centre agents, gardeners, cleaners, carers £15,000 4.7%
Construction workers, clerical workers £20,000 5.5%
Estate agents, nurses, prison officers, HGV drivers £28,000 6.2%
Pharmacists, managerial positions £50,000 7%


*
Average salaries via ONS

Age Band Male (Weekly) Female (Weekly) Male (Annual) Female (Annual)
16 to 17  £                188.50  £                164.00  £             9,802.00  £             8,528.00
18 to 21  £                337.00  £                309.60  £           17,524.00  £           16,099.20
22 to 29  £                477.90  £                440.80  £           24,850.80  £           22,921.60
30 to 39  £                613.30  £                557.50  £           31,891.60  £           28,990.00
 40 to 49  £                679.80  £                544.40  £           35,349.60  £           28,308.80
50 to 59  £                663.60  £                508.10  £           34,507.20  £           26,421.20
60 and over  £                571.30  £                448.00  £           29,707.60  £           23,296.00

 

NOW: Pensions www.nowpensions.com @nowpensions

NOW: Pensions entered the UK market in 2011 with a simple and cost-effective workplace pension designed specifically with the auto enrolment market in mind. It is one of the UK’s largest workplace pension providers with nearly two million members and more than 30,000 employers from a wide range of sectors.

NOW: Pensions has a good technical infrastructure combined with a pension product suitable for our team. We couldn’t be happier with NOW: Pensions.
Martin Woods, SALT.agency