The government has committed to requiring pension contributions to be paid from the first pound of a worker’s salary.
But it has given only a vague commitment to take action in the mid-2020s.
TUC research shows that a delay of six years in implementation could cut a saver’s pension pot by some £12,000. The hit amounts to nearly £6,000 once inflation is taken into account.
The problem has arisen because an employer currently does not have to include the first £6,000 someone earns when calculating pension contributions. This is called the Lower Earnings Limit.
This puts a huge dent in the amount being put aside.
And the lowest earners, for whom £6,000 is a large proportion of their earnings, will be hit the hardest.
From April, a worker on £10,000 (the salary at which someone is automatically enrolled into a pension scheme) will see £309 a year paid into their pension. This is a contribution rate of just over 3 per cent – well adrift of the 8 per cent headline rate.
If contributions were paid from the first pound of earnings, they would get more than double this: £800 a year in pension contributions. The employer contribution would rise from £116 to £300.
For a worker on £15,000, pension contributions would be £709 under the current system and £1,200 if their entire salary was taken into account. Their employer contribution would rise from £266 to £800.
The government’s own figures show that abolishing the Lower Earnings Limit would mean an extra £2.6 billion a year going into workers’ pensions, including £1 billion more from employers.
But the impact of this on affected savers would be massively amplified over their savings lifetime due to having missed out on investment returns.
The TUC estimates that a worker earning £10,000 and retiring in 40 years’ time (a reasonable expectation for a worker in the 20s today) could have a pension pot of some £62,387 in 2059 if the lower earnings limit was abolished in 2028. But if it was scrapped in 2022, this would be £74,654.
This is based on a balanced portfolio split 60/40 between equities and bonds and assuming investment returns of 5 per cent and 3 per cent a year respectively.
The difference in pot size for someone earning £15,000 is £115,710 compared to £103,443.
Taking into account inflation, the six-year delay could cost such a saver £5,570.
For a median earner on just over £24,000 a year, their final pension pot could amount to £177,390 if the LEL is abolished in 2028 against £189,660 if it was removed six years earlier.
This is why the TUC is urging the government to bring forward legislation to abolish the Lower Earnings Limit at the earliest opportunity.
Paul Nowak, Deputy General Secretary of the TUC will tell the TUC pensions conference: “Our message to government is simple – stop dithering, deliver on your promises and ensure every pound earned by every worker counts towards their pension.”