NOW
For all their well-publicised problems, NOW Pensions continue to talk sense on auto-enrolment and to do so fearlessly. Today is the day when we hit the 10m new savers mark, we were billed as having a discussion on this on Wake Up to Money but that never quite happened. So I’m pleased to see my friend Adrian Boulding saying it as it is. If we got that champagne out the fridge – let’s put it back on ice!
The facts are far from perfect news for all savers
- 10 million workers in the UK have now been auto enrolled into a workplace pension scheme
- Despite the success of auto enrolment, 12 million* are still under-saving for retirement
- Minimum contributions will rise to 8% of earnings in April 2019 but, due to the qualifying earnings bands, no auto enrolled saver will really be putting away 8%
- Lower earners and part-time workers, who are more likely to be women, lose out the most
Today the Department for Work and Pensions announced that since the introduction of automatic enrolment in 2012, 10 million people have been auto enrolled. Despite the success of the policy, using the savings adequacy measure introduced by the Pensions Commission, there are still around 12 million individuals under-saving for their retirement who make up 38% of the working age population.
Of these 12 million, the vast majority of those individuals who are under-saving – approaching 10.4 million (87%) – earn more than £25,000 a year.
And it gets worse
In April 2019, auto enrolled savers paying minimum contributions will see their contributions rise from 5% of qualifying earnings to 8%. But, the way auto enrolment contributions are calculated, means that no saver will actually receive the full 8% of their salary into their pension pot each pay period.
Auto enrolment minimum contributions are based on a band of ‘qualifying’ earnings. This means that for the 2019/20 tax year, the first £6,136 of an employee’s earnings does not count for the purposes of auto enrolment and anything over £50,000 isn’t included either.
For example, if an employee earns £20,000 their qualifying earnings would only be £13,864. For somebody earning £10,000 only £3,864 of their earnings would be pensionable.
NOW: Pensions carried out some analysis comparing outcomes based on 8% of total earnings compared with 8% of qualifying earnings.
The analysis is based on average* salaries for men and women, assuming 3% per annum investment growth. On average savers who make contributions on a qualifying earnings basis have pension pots which are 26% smaller than those who make contributions on every pound of earnings.
25-year olds retiring at 65
| 8% of qualifying earnings | 8% of total earnings | |
| Men | £167,457 | £206,982 |
| Women | £135,613 | £175,138 |
35-year olds retiring at 65
| 8% of qualifying earnings | 8% of total earnings | |
| Men | £114,487 | £139,538 |
| Women | £88,351 | £113,403 |
45-year olds retiring at 65
| 8% of qualifying earnings | 8% of total earnings | |
| Men | £65,672 | £80,000 |
| Women | £48,099 | £62,426 |
Who does this hurt most?
This affects all workers, but the low paid are particularly disadvantaged as the table below shows:
| Occupation | Average Salary based on ONS data | Annual pension contribution based on qualifying earnings | Annual contribution on every pound of earnings |
| Cleaners | £ 14,164.00 | £ 642.24 | £ 1,133.12 |
| Nursery Nurses | £ 14,305.00 | £ 653.52 | £ 1,144.40 |
| Cooks | £ 15,461.00 | £ 746.00 | £ 1,236.88 |
| Receptionists | £ 16,258.00 | £ 809.76 | £ 1,300.64 |
| PA and Secretaries | £ 24,508.00 | £ 1,469.76 | £ 1,960.64 |
| Bricklayers | £ 24,806.00 | £ 1,493.60 | £ 1,984.48 |
| Vehicle Body Builders and Repairers | £ 24,821.00 | £ 1,494.80 | £ 1,985.68 |
Boulding says
“Auto enrolment is working brilliantly getting more people than ever before into pension saving. But, the way contributions are calculated is selling savers short.
“Most people assume their contributions are on every pound of their earnings but, in reality, nobody making auto enrolment minimum contributions gets 8% of their salary into their pension pot every month.
“Each year the lower earnings band increases so the amount savers miss out on creeps up. Getting rid of the earnings bands, making contributions of every pound of earnings, would significantly improve retirement outcomes for millions of people but would be especially beneficial for low paid and part time workers who are more likely to be women.
In the 2017 auto enrolment review, the government committed to changing the law so that auto enrolment calculations on every pound of earnings by the mid-2020s but this month they chose to increase the lower earnings band from £6,032 to £6,136. It’s almost as though they’ve found the right station but have got on a train going in the opposite direction.”
Now all you need is an 8% pay rise to offset inflation and a jump in pension contributions.
Hey, while you’re forcing people to save into a vehicle they may not like, why not just take another few percent off them? Off those on low to medium salaries, who probably already struggle to make ends meet,
Save for the future by all means, but today’s figures have to stack up first.
Out of interest, can you AE straight into a SIPP?
Hi DaveC (nice name btw), Auto Enrolment requires an employer to provide a pension scheme that is judged suitable for all employees. Part of the suitability requirement is that an employer must choose a suitable default investment fund which has charges at no more than 0.75%pa and meets quality criteria.
The first point I would make is that a ‘true’ SIPP is a personal arrangement, which would fail the criteria. There is of a course a Group SIPP which I will get on to.
To my knowledge the concept of a ‘default fund’ doesn’t apply to SIPPs, whose USP is (supposedly) the ability to invest in a wide spectrum of underlying investments.
This same principle might apply to Group SIPPs, although there is significant scope for the employer to significantly reduce the spectrum and perhaps even introduce a default fund (note the charge is not the only criterion for determining suitability as a ‘default’ fund though).
It is far easier to select a GPP arrangement where the product will nearly always have a ‘default’ fund, but easier still to go the NEST/NOW pensions route as they were made with AE compliance at the core.
I could be mistaken but I think the lower earnings band ties in with the earnings required for full NI and therefore theoretically the full flat rate state pension at 67/68/69/70 (the minimum age at which you will have to work until if you’re poor basically).
Make no mistake, being stuck on AE is a sure sign you WON’T be retiring early or comfortably.
The difference between the median retirement ages between the generations has increased by about 10 years, with the basic cost of living significantly higher above inflation 30 years ago relative to the median salary. The provision of guaranteed retirements is virtually nil outside the public sector. The State pension has been changed significantly. The chances of living to a stupidly high age is also higher than its ever been..
Blessed are the young…