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Government delays to pension reforms could leave low-paid workers thousands of pounds worse off, according to new TUC analysis published today (Tuesday).

The government had pledged to remove the Lower Earnings Limit (LEL) - which would boost the retirement pots of low-income workers. But ministers are dithering and have only given a vague commitment to lower the threshold in the mid-2020s.

The LEL is currently £6,000, which means that the first £6,000 a person earns annually doesn’t count towards pension contributions. For the lowest earners, this is a high proportion of their income.

Removing the limit will therefore be particularly beneficial to the lowest paid and so should be done as soon as possible, says the TUC.

New TUC research shows that a delay of just six years could mean a worker earning £10,000 loses out on a sixth of the value of their pension pot. The losses include not only the missed contributions, but the investment gains foregone.  

Workers on annual earnings of £10,000 would see the amount saved in their pension every year more than double if contributions were calculated from the first pound of earnings.

If this was applied from 2022 rather than 2028, the added investment gains could boost their final pension pot by £12,000 in cash terms or approaching £6,000 accounting for inflation.

For a worker on annual earnings of £15,000, total annual contributions would rise by £500 with employer contributions soaring by 70 per cent.

TUC Deputy General Secretary Paul Nowak said:

“Automatic enrolment has been a great success. For the first time, many working people on low incomes have employers paying towards their old age.

“But the government needs to build on its success, so that every worker gets the pension pot they deserve. 

“Our message to government is simple – stop dithering, deliver on your promises and ensure every pound earned by every worker counts towards their pension.”

Editors note

- For workers retiring in 40 years’ time, the differences are as follows:

Annual income

Pension pot if limit changed in 2022

Pension pot if limit changed in 2028

Difference in cash terms

Inflation adjusted difference

£10,000

£74,650

£62,390

£12,270

£5,560

£15,000

£115,710

£103,440

£12,270

£5,560

The dates of 2022 and 2028 have been chosen as earliest and latest years compatible within a “mid 2020s” pledge.

*figures on contributions

Annual income

Employee contributions with LEL

Employer contributions with LEL

Employee contributions without LEL

Employer contributions

without LEL

£10,000

£193

£116

£500

£300

£15,000

£443

£266

£750

£450

The analysis assumes that pension savings are invested 60% in equities and 40% in bonds with annual returns of 5% and 3% respectively.

- The TUC’s policy calls for pensions for the lowest earners are:

• Employers to take a bigger share of contributions – at least two thirds.

• A route map to increased contributions amounting to 15 per cent.

• A straightforward, cost-effective way for people to turn their savings into a secure lifetime income.

- The Lower Earnings Limit is £6,032 this tax year, rising to £6,136 in 2019/20. https://www.thepensionsregulator.gov.uk/en/business-advisers/automatic-enrolment-guide-for-business-advisers/9-knowing-your-clients-ongoing-duties/automatic-enrolment-earnings-threshold

- Pension contributions rise to 8 per cent of earnings from April this year.

- The plan to abolish the Lower Earnings Limit was in the Automatic Enrolment Review published in December 2017. https://www.gov.uk/government/publications/automatic-enrolment-review-2017-maintaining-the-momentum

- The £2.6 billion figure is here: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/668657/automatic-enrolment-review-2017-analytical-report.pdf

- The Trades Union Congress (TUC) exists to make the working world a better place for everyone. We bring together more than 5.5 million working people who make up our 49 member unions. We support unions to grow and thrive, and we stand up for everyone who works for a living.