Don't miss the great savings pension train
- Millions are being left behind in the Government's auto-enrolment drive
Some part-time workers and those who are too young or too old are excluded
Five million self-employed are overlooked altogether
Auto-enrolment, the Government’s flagship pension programme, has prompted more than 8.5 million people to start saving for old age.
Since it was launched nearly five years ago, less than 10 per cent of those eligible have opted out of the scheme. But it is not the great success story some would have us believe.
Millions of workers have been excluded – those who earn too little to qualify, work part-time, are too young or too old. Also, nearly five million self-employed are overlooked altogether.
Even those who are enrolled risk sleepwalking into a straitened retirement because they have unrealistic expectations.
Experts say the minimum contributions demanded under the auto-enrolment regime are too low and calculated on just a narrow band of earnings – not a worker’s full pay.
The scheme automatically applies only to workers between age 22 and state pension age – who earn at least £10,000 a year – so large swathes miss out.
Those falling outside these rules have a right to ask to get on board but many do not bother.
Many believe enrolling means their retirement finances are sorted. Nothing could be further from the truth.
The current minimum contribution is 1 per cent from both employer and employee. This rises to 2 per cent and 3 per cent respectively in April next year and then 3 and 5 per cent a year later. Employees have the right to opt out of the scheme.
Darren Philp, of provider The People’s Pension, says: ‘It comes as almost a relief to get started. But many are lured into a false sense of security as soon as they have ticked the pension box. Saving 2 per cent now – or even 8 per cent by 2019 – is not enough.’
Experts agree 13 to 15 per cent is a more meaningful target.
One big scheme drawback is that minimum contributions are taken only from ‘qualifying earnings’ – with the first £5,876 of annual earnings usually ignored – and the maximum earnings considered being £45,000.
According to The People’s Pension, come April 2019 someone earning £10,000 may think they are contributing the equivalent of 8 per cent of pay. But, in fact, it will be just 3.3 per cent. For someone on £20,000 the contribution is 5.65 per cent, and for a £40,000 earner 6.82 per cent.
Pete Glancy, pensions expert at provider Scottish Widows, says many new pension savers are also suffering from overconfidence. He says: ‘Many look at those who retired in the 1960s, 70s and 80s when the state pension was more generous and started earlier. They are not thinking about the fact they will be waiting longer for their state pension.’
He adds: ‘Many younger people are also seeing people retire at 55 and playing golf every day and taking three holidays a year. They look at them and think, “I’m going to be all right too as I’ve been auto-enrolled into my workplace pension”.
‘The question is how to balance engagement and inertia. You need to frighten workers a bit such as saying having a little less today will let you live better tomorrow.’
The Government needs to act too. Dale Critchley, pension expert at Aviva, says it must increase the minimum contribution levels.
He says: ‘We are calling for an increase in contributions to 12.5 per cent by 2028 to enable pension saving to provide people with the lifestyle they want in retirement.’
While figures show some 92 per cent of workers have taken the opportunity to auto-enrol, these mask the limited reach of auto-enrolment’s tentacles. Glancy says: ‘The low opt-out figures are based on workers who have been “invited” to auto-enrol.
‘They do not include those who do not meet the eligibility rules, such as workers who are too young or whose income falls below the £10,000 threshold.’
People are not enrolled automatically even if their overall pay from several employers is higher.
Research by Citizens Advice shows that 250,000 workers earn less than the income threshold. Gillian Guy, chief executive, says: ‘Too many people are shut out of auto-enrolment.’
She is concerned particularly for women who often hold down several part-time jobs to manage commitments such as childcare.
Also excluded are 4.8 million self-employed workers, including 1.3 million in the gig economy – using apps to sell their labour, such as food delivery motorcyclists.
Adrian Boulding, head of retirement strategy at Dunstan Thomas, a pension software provider, says these people should be embraced within auto-enrolment as a matter of urgency.
He says: ‘The self-employed are half as likely to be putting money into a pension than employees.
‘Only 27 per cent do so against 50 per cent of all employees. Despite this they still expect to rely on a pension for retirement.’
The Government is considering the plight of the self-employed in its current review into auto-enrolment, including the possibility of enrolling them automatically through the self-assessment tax return. Andy James, pensions specialist at wealth adviser Tilney, says: ‘The self-employed will still miss out on employer contributions but enrolment through self-assessment would encourage them to save – and enable them to benefit from tax relief on contributions.’
Some employers do not want the hassle and cost of setting up a pension scheme and are either ignoring their auto-enrolment responsibilities – or actively encouraging employees to opt out. Such behaviour is illegal and will result in fines.
About 5 per cent of employers ignore auto-enrolment, either deliberately or through ignorance.
Concerned employees should ask management what they have in place – and consider reporting a reluctant employer to The Pensions Regulator if they fail to enrol them in a scheme.
An employer’s failure to act can lead to penalties starting with a fixed £400 – escalating to between £50 and £10,000 a day depending on the size of the workforce.
Many people earning less than £10,000 think they will be no worse off in retirement by opting out of a workplace pension. They argue they will receive a similar income to the one they are on now from the state pension – now about £8,300 a year.
But for most workers the state pension does not kick in until age 67 at the earliest. Many will find they need to retire earlier, so risk staring into a pension abyss.
Others simply cannot afford making the pension contribution. Indeed, it is feared that opt-out numbers will balloon come April 2019 when workers see 5 per cent contributions docked from their pay packets.
Among those who will review their situation is Sian Wickham. The 25-year-old office manager from Sussex has been auto-enrolled for just six months.
She says: ‘I considered opting out because I thought 1 per cent of pay would not make much difference to my final pension – and I also have other costs to consider, including a mortgage.
‘But then I decided it was better to start the pension ball rolling – especially with a contribution from my employer. But if in two years’ time I cannot afford the higher contributions then I will opt out.’
More confident is Samantha Richardson. Aged 37 and living in Leeds, she has two part-time jobs, spending three days a week as a legal secretary and also several evenings a week in a private healthcare facility. Samantha earns enough from the legal job to be auto-enrolled. She says: ‘I have been in the scheme since 2014 and contribute 4 per cent and my employer 3 per cent. I did not have a pension previously so I feel better now that there will be something extra for me in retirement, not just the state pension. It was silly of me not to do it before then. But I’m now doing what I can to make up for it – and hopefully won’t be destitute when I stop working.’
How we go the extra mile (by boat) to sign up our staff
Some employers see auto-enrolment as a financial burden.But others are going to great lengths to win over employees. Fish producer The Scottish Salmon Company goes the extra mile – sending pensions advisers across sea lochs in small boats to reach them.The firm employs 480 workers scattered across 60 sites on the remote west coast of Scotland and Hebridean islands.
The company’s financial adviser, Edinburgh-based Melville Independent, was tasked to educate them about a switch from an old Aegon pension scheme to the new one with Royal London. Melville’s Neil Wheelan says: ‘The visits often required us to travel in small boats to islands I did not even know existed to explain tax relief and employer contributions.’
Virtually all the workers are now members, including marine site manager Donnie Sinclair. He says: ‘Pensions can be confusing but we were kept informed every step of the way.’
The level of pension contributions to the scheme are higher than the minimum required by the Government. Employees must pay 3 per cent but The Scottish Salmon Company tops this up with a further 6 per cent – six times the official minimum.
Most auto-enrolment schemes make a single annual charge of 0.5 per cent of the pension’s value. But there can be additional costs.
Some make a monthly policy charge which can quickly erode ongoing returns. Workers who move jobs can switch their funds to a new employer’s scheme penalty free.
Most savers end up in a so-called default fund – usually a middle-of-the- road fund with investments and bonds – but with low charges.
Andy James of wealth manager Tilney says: ‘This may not be a bad investment for someone in their 40s but a young person can afford to take more risk with a more adventurous fund – though charges may be higher.’
Becoming an employer
Thousands of households are falling into the auto-enrolment trap.These include families employing nannies and gardeners.Even an elderly person paying someone directly for personal care in their home will come under the rules – a serious challenge for the infirm.
For information on your responsibilities visit The Pensions Regulator at thepensionsregulator.gov.uk.
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This article was written by Sally Hamilton from Financial Mail on Sunday (Daily Mail) and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to email@example.com.