One in 10 low earners could suffer hardship if they are auto-enrolled into a pension, a study finds

Earnings trigger to be auto enrolled into a pension is £10,000

Expanding pension auto-enrolment to workers earning less than £10,000 a year could put one in 10 of them at risk of hardship, new research reveals.

Joining a pension scheme could put an estimated 300,000 out of 3.17million people on a low income unable to make ends meet.

However, the auto enrolment system allows people to opt out.

And the vast majority of low earners would benefit from saving into pensions, where personal contributions are topped up by free government and employer cash, according to the study by the Pensions Policy Institute.

Those people would get a 7-13 per cent boost to the income they receive in retirement, found the report on low earners commissioned by the Pensions and Lifetime Savings Association

How much are people meant to save into pensions at present? 

Under auto enrolment, employers are required to put a minimum of 3 per cent of earnings between £6,240 and £50,270 into staff pensions. Tax relief from the Government provides another 1 per cent.

Workers must put in at least 4 per cent on their own behalf, and if they opt out all the above is lost.

The earnings trigger to be auto enrolled into a pension on the above terms is £10,000.

Pension experts warn that an 8 per cent savings level falls short of what is needed for a comfortable retirement, and some are calling for a phased increase to 12 per cent.

> How much do you need to save for a decent retirement? Find out here 

Who pays what: Auto enrolment breakdown of minimum pension contributions for basic rate taxpayers at present

More lower earners and young workers aged 18-21 are set to be covered by pension auto-enrolment in future, although the timing is not yet finalised by the Government.

The age limit to be auto-enrolled will be cut from 22, meaning young people who have the most to gain from compound investment growth will start saving sooner.

Meanwhile the band of earnings, currently £6,240 to £50,270, on which workers, employers and the Government pay at least an 8 per cent contribution into pensions is going to be widened. 

The lower limit of that band will be abolished, enabling people to save from the first pound of earnings.

The PPI report found people excluded from auto enrolment because they earn less than £10,000 are a complex demographic encompassing diverse subgroups – some of whom might be on low incomes for limited periods, like students. 

Younger people are the most over-represented group, but others are those close to retirement age, women, and people paid by the hour.

Although one of 10 of them would be at risk of ‘over saving’ – where joining a pension could harm their current financial situation – for the rest this would be mitigated for reasons like already having another pension, or having a partner or spouse who earns more than them.

The PLSA is now using evidence from this research to look at ways to offset any detrimental impact from pension saving on low earners, and it will publish a report on this in the autumn.

But it has already floated the following measures, all of which could be implemented as a package:

– Keeping or lowering rather than fully removing the £10k trigger for some low earners

– Creating other short or longer-term savings options, such as emergency or ‘rainy day’ savings funds

– Providing family or carer top ups through the benefits system

– Offering workers temporary ‘opt-down’ levels, rather than only ‘opt-out’ options for contributing to a pension

– Tailoring specific help to workers paid by the hour.

Separate research by the PLSA previously looked at how much people need to save for a basic, moderate and comfortable retirement.

Scroll down to find out what sort of lifestyle a single person or couple can expect in old age, based on how much they manage to save up – but note that the figures exclude housing costs, so you will need more if you are renting or still paying off a mortgage in retirement.

Most low earners have some characteristic that means they would unaffected by or protected from the financial impact of being auto enrolled into a pension, according to the PPI

‘The £10,000 earnings threshold for automatic enrolment was employed to protect workers on the lowest earnings from saving for the future when they might be better off having more money in their pockets today,’ says Nigel Peaple, director of policy and advocacy at the PLSA.

‘However, the existence of the threshold does result in certain groups, notably women and carers, having lower pensions than average.

‘We wanted to understand the make-up of this under-researched group and explore whether policy interventions could safely improve their retirement outcomes without hurting their standard of living in the here and now.

‘This research suggests it could be feasible to safely bring the majority of low earners into the automatic workplace pension savings system without significant detriment, provided there are also carefully designed policy measures to protect those at risk of over-saving.’

Many mothers who are only pushed under the £10k income trigger for auto-enrolment after having their first child see their earnings affected for many years to come

John Upton, policy analyst at the PPI, says: ‘Our modelling demonstrates that nine in 10 low earners have some mitigating circumstance that would mean that, if they were to be automatically enrolled, their living standard is unlikely to be reduced below an adequate level.

‘As automatic enrolment policy is further developed, it is worth considering whether levers can be introduced which ensure greater involvement of low earners who will not be disadvantaged by saving.

‘With low earners being such a complex group, this is no mean feat. However, automatic enrolment has been one of the greatest success stories of pensions policy in recent history, and to include more of the right people in it would be a worthwhile achievement.’

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, says: ‘One of the key debates on auto-enrolment is making sure that only those who can afford to save into a workplace pension actually do so.

‘Boosting pension saving is incredibly important but must not be pursued at the expense of people’s financial resilience in the here and now.

‘It’s fair to say that there are low earners who can afford to save into a pension – young people living at home, and those who are part of a higher earning household.

‘However, the earnings trigger plays a vital role in making sure people are not being put under unnecessary strain by auto-enrolment and should remain in place.’

Retirement income needs for single people  (Source PLSA)

Retirement income needs for couples (Source PLSA)

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