One in 10 low-income earners could struggle if they’re automatically enrolled in a pension, study finds

Extending auto-enrollment into pensions to workers earning less than £10,000 a year could put one in 10 of them at risk of getting into trouble, new research has found.

Participating in a retirement plan could leave an estimated 300,000 of the 3.17 million low-income people unable to make ends meet.

However, the automatic enrollment system allows people to opt out.

And according to the Pensions Policy Institute study, the vast majority of low-income earners would benefit from saving for retirement, where personal contributions are supplemented by free money from the government and employer.

Those people would receive a 7-13 percent increase on the income they receive when they retire, according to the report on low earners commissioned by the Pensions and Lifetime Savings Association

How much should people currently save for retirement?

Under auto-enrollment, employers are required to put a minimum of 3 per cent of earnings between £6,240 and £50,270 into staff pensions. Government tax relief yields another 1 percent.

Employees must put in at least 4 percent for themselves, and if they choose, all of the above will be lost.

The income trigger to be automatically enrolled in a pension under the above conditions is £10,000.

Pension experts warn that an 8 percent savings level is not enough for a comfortable retirement, and some advocate a phased increase to 12 percent.

> How much should you save for a dignified retirement? Find out here

Who pays what: Auto-enrollment breakdown of minimum pension contributions for basic rate taxpayers at the moment

In the future, more lower-income and young workers aged 18-21 will be covered by automatic pension enrolment, although the government has not yet set the timing.

The auto-enrollment age limit is being lowered from 22, meaning young people who stand to gain the most from compound investment growth are more likely to start saving.

Meanwhile, the income margin, currently £6,240 to £50,270, at which workers, employers and the government contribute at least 8 per cent to pensions will be widened.

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

The PPI report found that people excluded from automatic enrollment because they earn less than £10,000 are a complex demographic that includes diverse sub-groups – some of whom may be on low incomes for limited periods, such as students.

Young people are the most over-represented group, but others are those approaching retirement age, women and people who are paid by the hour.

While one in 10 of them would be at risk of ‘saving too much’ – where joining a pension could harm their current financial situation – this would be limited for the rest for reasons such as already having another pension, or a have a partner or spouse who earns an income. more than them.

The PLSA is now using evidence from this study to look at ways to offset any adverse impact of retirement savings on low-income earners, and will publish a report in the fall.

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

– Keeping or reducing the £10,000 trigger instead of removing it entirely for some low earners

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

– Providing supplements to family or carer through the benefits system

– Offer employees temporary ‘opt-down’ levels, rather than just ‘opt-out’ options to contribute to a pension

– Provide specific assistance to employees who are paid by the hour.

A separate study 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 kind of lifestyle a single or couple can expect in old age, based on how much they manage to save – but bear in mind that the figures do not include housing costs, so you’ll need more if you are renting or still paying off your mortgage at retirement.

According to the PPI, most low-income earners have a trait that means they are not affected by or protected from the financial consequences of automatic retirement participation.

“The £10,000 auto-enrollment income threshold was used to protect workers with the lowest incomes from saving for the future, when today they may be better off with more money in their pockets,” said Nigel Peaple, director of policy and advocacy at the PLSA.

‘However, the existence of the threshold means that certain groups, especially women and informal carers, have a lower pension than average.

‘We wanted to understand the composition of this underserved group and investigate whether policy interventions could safely improve their retirement outcomes without harming their living standards in the here and now.

This research suggests that it could be feasible to bring the majority of low-income earners into the workplace automatic retirement savings system safely and without significant drawbacks, provided there are also carefully designed policies in place to help those at risk of oversaving. to protect.’

Many mums pushed below the £10,000 automatic enrollment income trigger only after having their first child will see their earnings impacted for many years to come

John Upton, policy analyst at the PPI, says: ‘Our models show that nine in ten low-income earners have an extenuating circumstance that, if they were automatically enrolled, their standard of living is unlikely to fall below an adequate level. .

“As the auto-enrollment policy continues to evolve, it is worth considering whether levers could be introduced to increase the involvement of low-income earners who would not be penalized by savings.

‘Given that low incomes are such a complex group, that is no sinecure. However, auto-enrollment is one of the greatest pension policy success stories in recent history, and it would be worth getting more of the right people involved.”

Helen Morrissey, Head of Retirement Analysis at Hargreaves Lansdown, says: ‘One of the key discussions about auto-enrollment is making sure that only those who can afford to save for a company retirement actually do so.

‘Stimulating pension savings is extremely important, but it must not be at the expense of people’s financial resilience in the here and now.

It’s safe to say that there are low-income people who can afford to save for retirement: young people living at home and those living in higher-income households.

“However, the revenue trigger plays a vital role in ensuring that people are not unnecessarily pressured by auto-enrollment and left in place.”

Need for retirement income for single people (Source PLSA)

Retirement Income Needs for Couples (Source PLSA)