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

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.

MaleFemale
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 titleAnnual salaryActual contribution
Part time workers, shop staff, waiters / waitresses£10,0003.1%
Call centre agents, gardeners, cleaners, carers£15,0004.7%
Construction workers, clerical workers£20,0005.5%
Estate agents, nurses, prison officers, HGV drivers£28,0006.2%
Pharmacists, managerial positions£50,0007%


*Average salaries via ONS

Age bandMale (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

More information

Samantha Gould – NOW: Pensions
Email: pressoffice@nowpensions.com
Fenella Cuthbert – Cicero/AMO
Tel: 0207 947 5327

Fenella.Cuthbert@cicero-group.com