It has been two years since the Government first rolled out auto-enrolment as the solution to the pension gap. The scheme was designed to plug the gap between the cash consumers needed in retirement in order to elevate themselves from pension poverty – and what the state could provide.
But the system, which automatically enrols employees into a workplace pension is not fool proof. Over the past 24 months 4.68 million people have been passed over for auto-enrolment because they were not eligible. Of this figure it is estimated that three quarters are women.
These workers do not qualify for auto-enrolment because they earn less than the minimum threshold, are too young - or are older than the state pension age. Because many of these workers are part-time a disproportionate amount of unenrolled workers are woman. Women are more likely to have flexible working hours following childbirth. The lower threshold is currently set at £10,000 until at least April 2015.
A further four and a half million have not been able to benefit from the retirement solution because they are self-employed.
Currently employers are only obliged to match up to 1% of employees’ salary in pension contributions, and a shocking 90% of firms only do the bare minimum. From 2018, when auto-enrolment is fully implemented this will jump to a minimum contribution of 3% from the employer. Employees will be required to contribute 4% of their salary and there will be a 1% tax relief from HMRC.
There are concerns that 1% is not sufficient to build up a pension pot – but this is 1% more than self-employed people are benefitting from.
“Many workers currently have just the bare minimum being paid into their pension accounts; a total pension contribution of 2% of their salary,” said Tom McPhail of stock broker Hargreaves Lansdown.
“Even when auto-enrolment is fully up and running, many will only have 8% of their salaries being paid into their pension. This is not enough. A savings rate of 12% or more of income towards long term retirement provision is necessary if they are to achieve later life financial security.”
Currently those that are self-employed can set up a personal pension or SIPP in order to efficiently save for retirement. But there are discrepancies between workplace pensions and SIPPs. Contributions paid into SIPPs benefit from basic tax relief. If you pay in £80 it will be topped up by the government to £100. If you are a high rate taxpayer, you have to claim the extra tax relief by yourself by filling in your tax return.
“Sadly, quite a few high rate taxpayers don't realise this and don't claim it back,” warned Alan Higham, Retirement Director for Fidelity. “The Inland Revenue actually benefits from quite a lot of unclaimed tax relief here.”
As well as a lack of employer contributions and a lower level of automatic tax relief, self-employed workers pay National Insurance Contributions (NICs) on their pension saving.
Workplace schemes allow you to make salary sacrifice contributions – paid from your earnings before they are liable for income tax or NICs. But SIPP contributions do not work in this way. The auto-enrolment review is currently scheduled for 2017, but many industry experts are calling for this to be brought forward.
