At what level should the automatic enrolment threshold be set?

July 1, 2014 David Piltz

Those earning under £10,000 a year do not have to be automatically enrolled into a workplace pension scheme. The Labour party has suggested this £10,000 threshold should be reduced to £5,772.  They are concerned that one and a half million workers are currently being left out of the savings system. The ABI, into whose members’ products a lot of these lower paid workers would be saving, has unsurprisingly welcomed the proposals.

UK Pensions Minister Steve Webb has criticised Labour plans to extend auto-enrolment (AE) to all low-paid workers and he has got a point. He says if you automatically enrolled someone earning £6,000 a year they would currently be paying in 8.8p a week in contributions, which he estimates over 35 years would give them a pension of around £1.93 a week.

The simple fact is many workers earning under £10,000 a year will not be able to afford to put away enough money into pensions to make a significant difference to their retirement. Those who can afford to put money away have the option of opting in. However, as Steve Webb says, anyone earning and used to living on £6,000 a year will get a state pension of £7,500 a year. So does it make sense for them to make payments out of the £6,000 a year they get whilst working to top up a pension of £7,500 a year?  They are actually already going to be better off in retirement.

The Labour party has hit back with Shadow Pensions Minister Gregg McClymont saying: “Library figures show someone earning just below the raised threshold for AE could save up to £20,000 over a working lifetime – quite a decent nest egg.”

While I can see both sides of the argument, what seems clear is that automatic enrolment is not going to give millions of lower paid workers what many people would view as a comfortable retirement. According to a recent poll by Aviva, an average annual income of £15,000 is required to sustain the lifestyle those over the age of 40 expect to have in retirement. Double the proposed new state pension!

Whether you set the threshold at £10,000 or £5,772 is probably not going to make much difference in pension terms to those on the bottom rungs of the income ladder, who can only dream of retiring on a pension of £15,000  a year. Automatic enrolment has been a success, but perhaps all politicians should recognise that one of its limitations is that it does little for the very low paid. For a defined contribution pension arrangement to be a success you have to pay in the sort of money the vast majority of very low paid just have not got.

About the Author

Biography

Previous Article
More retiree cashouts in the pipeline

Offering to cash out retirees in pay-status can be costly when seeking to buy annuities for the remaining p...

Next Article
Should you convert your defined benefit pension arrangement?

Do I feel lucky? That’s a question anyone contemplating transferring from a defined benefit pension arrange...