Matthew 26.11
This blog asks questions about how best to deal with genuine poverty. The financial services answer has been “financial empowerment” , saving our way out of debt. It is a flawed idea, ask those just getting by. Here are my 10 reasons why we should not enrol those earning less than £10,000 per annum,
- If you earn £10,000 and don’t have any other earnings, you spend a lot of time applying for benefits and visiting food banks. You should not find yourself in debt because you auto-enrolled into a pension
- It is a lot harder to opt-out of a workplace pension when you are short of financial confidence and in need of the job.
- If you earn below £10,000, you should be entitled to an employer contribution from £1 of your earnings but you are not. This from the DWP
If your income is low
Your employer does not have to contribute to your pension if you earn these amounts or less:
- £520 a month
- £120 a week
- £480 over 4 weeks
- If you earn less than £10,000 , you only get a taxman’s incentive (worth 25% of your contribution)if you happen to be in a scheme operating relief at source (most schemes don’t)
- If you earn less than £10,000 and you don’t have a complete State Pension contribution record, you are probably in line for pension credit – an AE pot could knock that on the head.
- If you learn less than £10,000, you are likely to have lots of small pots, being eaten away by fixed charges
- Workplace pensions would rather stick needles in their eyes than take on a load of small pots that will never wash their face. (probably why the PLSA are highlighting the risks of removing the lower earnings limit)
- Even if you are unlucky enough to be a lifetime low-earner – auto-enrolment won’t make that much difference. These are the PPI”s numbers – it’s the state pension and benefits that matter to the poor.
- Those on low earnings often have incomplete national insurance records and might well be better buying years (especially discounted years) of state pension credits
- “Further research on low earners, the needs of under-pensioned workers, and the intersectionality of different characteristics are needed” (Nigel Peaple -PLSA)
In my opinion , the best thing any Government should do for the genuine poor is support them properly with benefits.
The low earners used to be called “entitled”, which meant they were entitled to opt in to a workplace pension but they weren’t entitled to a contribution. That should change. If auto-enrolment is extended to cover earnings from £1 (taking away the contribution threshold) then low earners should be entitled to an employer’s contribution if they opt in (as those under 22 are).
The PLSA has asked
Can low earners be safely auto-enrolled in workplace pensions?
The answer is no. The 300,000 low earners the PPI reckon can’t afford to be “in” are often too vulnerable to get “out”. We must get out of the mindset that says that everyone should be saving, a great chunk of our population need to just get by.
Just a couple of over detailed points on this. In your number five, it’s pretty unlikely that anybody with earnings approaching £10,000 is going to get Pension Credit. That’s because any net earnings are taken penny for penny away from any Pension Credit entitlement that’s very different from the situation with Universal Credit where there are a number of disregards, including all pension contributions, and only a part of what’s left is used as income in the benefits calculation. For Pension Credit as part of any earnings is likely to go, effectively, directly to the government to replace any benefit entitlement, before any real gain in net income happens.
Although affecting probably only a few people, there would be some people for whom auto enrolment might cost hundreds of pounds a month. That’s because the overall benefit cap has an earnings threshold figure above which it isn’t applied. As pension contributions reduce net earnings for Universal Credit, there will be some people whose contributions push their net earnings below that threshold and make them liable to the cap. That’s also the reason why it makes sense for some people to reduce their voluntary pension contributions, as opposed to government aims as that is.
Hi Henry
I do agree that there may be some low earners who would not be best advised to put money into a pension scheme, but to lock out all low earners like this would particularly disadvantage part-time workers – many of them women – who hav emore than one job, earning under £10k a year, but who currently get no benefit from auto-enrolment, or the free money from tax relief and employer contributions. They may be earning £20k or £30k and still have no pension accrual which I can’t believe you would recommend. The big injustice is not having employer contributions from pound zero and being put into a Net Pay scheme with noone compensating for the extra 25% contribution they are forced to make without realising it. This penalty still applies to those earning £10k up to the personal tax threshold of course.
What low earners really need is financial advice, to help them understand whether pension contributions are potentially going to undermine benefits for them, but in the absence of such advice, I don’t think it is right to just ban those low earners from benefitting from auto-enrolment altogether.
Sadly, pension saving should be simple and suitable for all, but it is not. That does not make it wrong though and starting to have some pension savings is, for almost everyone, better than not doing so in my opinion.
Thanks for all your interesting thoughts, even if we don’t necessarily agree.