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.
|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.”
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|