The Government is facing calls from the pensions industry to reform auto-enrolment contribution rules, to help boost overall levels of pension savings.
These calls come as the AE minimum contribution levels are due to rise from 5 to 8 per cent on April 6.
Now Pensions points out that in reality no auto-enrolled saying paying minimum contributions will be saving the full 8 per cent, because of the way contributions are calculated.
On 6 April, the lower qualifying earnings threshold will rise by £104, meaning employees won’t receive auto enrolment minimum contributions on the first £6,136 of their earnings each year. Earnings over £50,000 won’t be included either.
For somebody earning £25,000 a year, this means only £18,864 of their salary is counted when calculating their auto enrolment contribution.
If minimum contributions remain at 8 per cent of qualifying earnings, the average 25 year old male worker will see £125 per month (£1,497 per year) added to their pension pot, instead of £166 per month (£1,988 per year).
The average 25 year old female worker will see just £111 per month (£1,342 per year) added to their pension pot compared to £153 per month (£1,833 per year).
Now Pensions calculated that over 40 years this would reduce the average pension pot by as much as £40,200.
Now Pensions policy director Adrian Boulding says: “Auto enrolment is helping 10 million people save for their future. But the way contributions are being calculated are leaving many short changed.
“The rules are especially unfair for part-time workers who have the same £6,136 taken off their earnings as their full-time colleagues.
“The government has an opportunity to give auto enrolled savings a shot in the arm by changing the way contributions are calculated. This is a measure we hope to see included in the Pensions Bill expected in the Spring.”
Other pension specialists are also calling for change. Many are calling for the government to abolish the “net pay tax trap” which sees lower earners in certain types of occupational schemes miss out on valuable tax relief.
Likewise there has been concerns that the AE earnings trigger will remain at £10,000. This means that those with salaries of less than this will not automatically be enrolled into a pension – although they have the right to join one.
There are concerns that these issues contribute to the gender pension gap, with many lower-paid and part-time workers being women.
Close Brothers says more needs to be done to raise the overall level of pension savings in the UK.
It’s latest Financial Wellbeing Index points out that only a third (36 per cent) of UK employees feel prepared for their retirement, with this figure dropping to just 22 per cent for those aged 55 or over.
This index also showed that funding retirement is the most common worry among UK employees – cited by 31 per cent of people.
However, despite this, 35 per cent of employees admit they never review the amount they are saving into a pension.
Close Brothers head of financial education Jeanette Makings says: “Auto-enrolment has transformed the savings landscape in the UK, with the government and employer alike working towards solving the retirement savings gap.
“Previously disenfranchised demographics are now more involved in planning for later life, and the low levels of opting out of the scheme are evidence that the programme has been successful for many workers.
“However, we still have a long way to go. People are not saving enough into their pension for a comfortable retirement – the bare minimum will not suffice.”
She adds: “This gap is caused by a deficiency of knowledge and interest, with a third of employees admitting to never reviewing the amount that they are saving into their pension and almost half of those approaching retirement feeling unprepared and out of their depth. Employers have a duty to support their staff, providing education about the real cost of retirement and guidance as to how to get financially ready, including saving early and often to reach your financial goals.”