Retirement expert reveals that pension contributions should change with living wage rises

The pension auto-enrolment system was introduced to make it compulsory for employers to automatically enrol eligible workers into a pension scheme. On top of this, the employer would then pay money into the scheme.

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Recent analysis from Quilter has revealed that earnings and pension contributions often coincide in an unfortunate manner.

As Jon Greer, the head of retirement policy at quilter explained:

“The future increases in the living wage and its proposed extension to those from age 21 (targeted from 2024) could be used as an opportunity to coincide with increases in minimum pension contributions under automatic enrolment.

“The existing auto-enrolment rules have a lower and upper limit, creating a ‘qualifying earnings band.

“For the 2019/20 tax year, this is between £6,136 and £50,000 a year.

“It means that those on very modest incomes might only be making a pension contribution based on a small portion of their overall salary.

“Previous reviews have recommended abolishing the lower limit on the earnings band. This would result in higher pension savings levels thanks to 100% of someone’s earnings up to £50,000 being used as the basis to calculate pension contributions. For some lower earners, this could double their contribution if the lower earnings limit is abolished.

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“When the living wage goes up it feels like an opportune time to coincide with the removal of the lower limit on qualifying earnings.

“Because the lowest-paid workers will be getting a pay rise, thanks to the increase in the living wage, a small increase in the deduction made for their pension may not be as noticeable.

“Recent data shows that auto-enrolment opt-out rates have remained relatively low. However, the government has remained reluctant to tinker with the policy in order to raise contribution levels and extend participation.

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“That is understandable as they are nervous about causing disruption to a policy which has so far been broadly successful.

“But we would urge them to consider this tweak to the system. It would be a shame to miss the opportunity to increase retirement savings at the same time as a planned national pay rise.”

Quilter calculated what would happen if the lower earnings band was removed and contributions were payable form the first pound of earnings.

They found that the increase in contributions would be the same for both income levels.

But the proportionate increase employee contributions for lower earners is much higher.

As Jon concluded: “Without an offset, the impact will be much more noticeable for the lower earner so it should be coordinated with an increase in the national living wage.”

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