Are low earners at risk from auto enrolment?

1 March 2016

Are low earners at risk from auto enrolment? The main push for the government to introduce auto enrolment was the fact that with a rapidly ageing population, the general population of the UK was saving less and less for their retirement, leaving more and more people relying on their State Pension and social security benefits. It was clear that this situation was and is unsustainable, and for that reason auto enrolment was seen as a solution and in many ways it is. There is no doubt that it has been a success so far, with the implementation presenting very little problems to the companies who have already gone through the process and with an opt-out rate amongst employees of just 10%. By the end of the process, it is thought that there will 9 million more people saving for their retirement thanks to auto enrolment.

Concerns over the low paid

However, there are concerns that due to how auto enrolment is set-up that it is excluding some lower paid workers or at least not giving them the full benefit. The first issue is the £10k earnings threshold. As well as excluding any employees who earn less than this (and it could be argued who need to be saving for their retirement more than anyone), it also fails to help people with multiple jobs which is a phenomenon that is becoming more and more common. For example, an individual could have two part-time jobs, each earning them £9,000 per year (a total of £18,000). However, because each job is less than the £10k earnings threshold, the individual would not be eligible for auto enrolment and will miss out on its many benefits.

The other concern has this week been highlighted by the person at the very forefront of the rollout of auto enrolment, the government's Pensions Minister Baroness Ros Altmann. In a speech at the Trades Union Congress (TUC) pension conference, she revealed that those employees who are on low incomes could lose as much as 25% in tax relief on their pensions depending upon how their funds are set up. Some occupational pensions schemes used by some companies under auto enrolment calculate contributions on what are called 'net pay arrangements' which is where gross contributions are deducted from pre-tax pay. This is instead of the other (more favourable for low earners) 'relief at source' style of contributions where net contributions are deducted from post-tax pay.

Ros Altmann said:

"In net pay schemes, those earning less than £11,000 a year won't get the tax relief due to them and may end up paying 20 to 25 per cent more than the same pension for a higher paid colleague… We must help the smaller employers. The type of scheme your employer chooses for you can be crucial for the pensions of the low paid."

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