Can this government policy end pensioner poverty?

Auto-enrolment is continuing its rollout and new government figures estimate that after its completion, £15 billion will be saved into a workplace pension each year.

Minimum contributions are currently low, totalling 2% of salary after tax relief and employer match are factored in, which will not be sufficient for a comfortable retirement. However, with a rising state pension age, sufficient private pensions could be essential for people to have control over their retirement age and the contributions are likely to increase in the future.

To qualify for auto-enrolment, a person needs to:

  • Be at least 22 years old but below state pension age
  • Earn £10,000 or more a year
  • Work in the UK

It’s not the Hotel California

Workers who meet the above criteria are (or will be) automatically enrolled into a pension scheme, but they have the choice to opt out.

This is really only worthwhile if someone has alternative savings or investment strategies, rather than feeling unable to afford it – the earlier you save the larger your fund can grow, so the smaller the contributions can be.

Pensions are a particularly powerful savings vehicle because of the tax relief and employer contributions.

If you are a basic-rate taxpayer, for every £80 you contribute your fund will grow by £200, with tax relief adding £20 and your employer matching the total. Higher- and additional-rate taxpayers would need to contribute £60 and £55, respectively, claiming the additional 20% or 25% tax relief back from HMRC with their tax return.

The vulnerable aren’t protected

Auto-enrolment can undoubtedly be called a success, with around 90% of people remaining in their workplace pension. Nonetheless, the eligibility criteria means that the people most vulnerable to insufficient savings are excluded.

As it only includes employees, the self-employed are excluded. Irregular income can make it difficult to plan and save, especially as many business owners prefer to put profits back into the business. Those that do start their own pensions will not receive employer contributions, which means that instead of having £200 by saving £80, a basic-rate taxpayer will have £100.

There is also a significant gender divide, because nearly three-quarters of people in part-time work, and almost two-thirds of people earning £7 or less an hour, are women. Unlikely to meet the minimum earnings threshold for auto-enrolment, the prospect of a financially secure retirement could be bleak.

With 54% of 22-29 year olds now in workplace pensions, there is a strong argument to widen the criteria to help more people, but whether or not this will happen remains unclear.

Have you been enrolled into a workplace pension? Let us know with a comment below.

Call 0800 304 7288 for a friendly chat about your pension

Important information

*Tax treatment depends on individual circumstances and is subject to change 

The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article. For our latest information and news, please see our articles section: https://www.portafina.co.uk/whats-new\

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