NOW: Pensions Comments on Data Published Today by Office for National Statistics…
Morten Nilsson, CEO of NOW: Pensions comments on data published today by the Office for National Statistics which reveals that Britain now has the highest level of pension saving since records began in 1997:
“Auto enrolment is clearly doing its job, helping to increase participation in workplace pensions.
But, there’s no room for complacency. While 5.1m workers had been auto enrolled into pensions by the end of January, an almost identical number had been excluded from the initiative, mostly on the grounds that they do not earn enough to qualify.
By restricting auto enrolment to those earning at least £10,000, the rules exclude millions of low paid workers, particularly women, who earn less than that, even if they have several jobs that together add up to more than £10,000.
The other pressing issue the government now need to address is the adequacy of the contributions savers are making. The reality is that auto enrolment minimum contributions simply aren’t enough for most people to be assured of a comfortable retirement.
There are a number of steps that can be taken to address this. Currently, auto enrolment minimum contributions only have to be made on qualifying earnings.
For the 2014/15 tax year this is set by the DWP between £5,772 and £41,865 a year. This means that the first £5,772 of an employee’s earnings isn’t included in the auto enrolment calculation. For example, if a worker earns £20,000 their qualifying earnings would be £14,228. The maximum amount contributions can be based on is £36,093 (£41,865 minus £5,772) for the 2014/15 tax year.
The ‘qualifying earnings’ approach is not only potentially misleading – many people assume they are contributing 8% of their entire salary – but also hits low earners, women in particular, disproportionately.
For someone on £10,000 a year, 8% of qualifying earnings actually means just 3.4% of their total salary is being contributed. So when they come to retire, they will have saved less than half what they expected. An urgent priority should therefore be the removal of qualifying earnings, with contributions instead being based on every pound of earnings.
Looking ahead, serious consideration needs to be given to increasing minimum contributions to between 12% and 15%. The easiest way to achieve this is through auto escalation whereby employees are nudged into diverting annual pay increases into their pension plan. As with auto enrolment, employees have the right to opt out, but auto escalation has the behavioural advantage that workers do not miss money they never had.”
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