Research has shown that lower earners may struggle to pay their personal contributions, yet this doesn’t translate into opt outs, suggesting the financially insecure are increasing personal debt levels instead. Based on the Department for Work and Pension’s definition of ‘low pay’**, those earning less than £17,500 would be permitted the option to opt out of personal contributions while continuing to receive employer contributions. This additional earnings threshold would be reviewed on an annual basis.
Currently, AE contributions are set at 8% of qualified earnings - 5% from employee and 3% from employer. The first research paper, published in February 2020, concluded that for a median earning household, a contribution level of 12% of whole salary may enable families, when combined with full state pensions, to achieve a moderate retirement. The proposals published today recommend that to reach the optimal 12%, contributions should be split evenly between the employer and employee and should be phased in over a period of six years at a rate of 0.5% per year, commencing in 2023.
The net pay anomaly is also an issue which hits the lowest earners. In line with the Net Pay Action Group, TISA recommends the anomaly should be corrected through an HMRC end of tax year reconciliation progress using RTI data. This would ensure a bonus, representing any tax relief forgone to those impacted, is automatically paid.
Renny Biggins, Head of Retirement at TISA, commented: “We are pleased to present phase two of the campaign which sets out our proposals to progress AE and ensure that everybody has the opportunity to save for their futures. AE has been a bigger success than anyone could have imagined but, nearly 10 years on from its inception, changes need to be made to ensure it continues to develop and serve hard working people in the UK.
“Research has shown that opt out levels have remained consistently low, lower than predicted, which is excellent news but may also have a detrimental impact on the lowest earners. This could result in levels of debt reaching unsustainable levels, yet it is also vital people are saving for their futures.
“We hope to continue working closely with the Government to realise these proposals, most notably to protect the lowest earners and to ensure contributions reach the necessary 12% of pensionable salary for the majority, which will allow people and households to retire on a moderate income as set by the PLSA Retirement Standards.”
‘Getting Retirement Right’ intends to help inform and influence the debate on AE contribution levels. It is run by TISA in collaboration with major pension and investment firms.
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