'Pensions for All' Won't Work

FUTURE PROOF: Labour MP Rachel Reeves has proposed that low paid workers are auto-enrolled in pension schemes, but 4% contributions are too steep

Emma Wall 30 May, 2014 | 9:21AM
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Pensions should not just be for the privileged but instead for all workers, claims Labour’s Rachel Reeves. The shadow secretary for Work and Pensions has proposed that auto-enrolment be extended to include low paid workers, extending the eligibility thresholds down to £5,772.

Auto-enrolment was launched in October 2012 starting with the country's largest companies and around 10 million people will eventually be enrolled into schemes by 2018.

Millions of workers will be left out of the scheme however – an estimated 4 million so far. 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.

“Labour is highlighting an important issue for lower earners, who risk missing out on pension membership,” said Laith Khalaf of stock broker Hargreaves Lansdown.

“Anyone earning less than £10,000 from a single employment is not certain of being put into a pension and benefitting from employer contributions.”

David Macmillan, managing director of Aegon UK said while auto-enrolling those who earn less may be beneficial for their long term financial health, it may be too much of burden in the current economy.

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.

“Extending pension auto-enrolment to catch the UK’s lowest paid workers would be a positive step, but the main challenge will be in determining how affordable auto-enrolment will be for those on the lowest incomes where in many cases household finances are already stretched,” he said.

Khalaf said that he was concerned that lowering the threshold as far as Labour has suggested would not be beneficial, and instead he suggested individuals with multiple employments have their earnings aggregated so that if their total earnings from all employments exceed £10,000, they are enrolled in a scheme.

Macmillan added that lower paid workers will feel the most benefit of the flat rate state pension when it is introduced next year.

 

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Emma Wall  is former Senior International Editor for Morningstar