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Self-employed and multiple job holders could be auto-enrolled into pensions

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Written by: Paloma Kubiak
12/12/2016
The government has announced a review of auto-enrolment next year in a bid to encourage more people to save into a workplace pension.

Almost seven million people have been enrolled into a workplace pension since auto-enrolment was first rolled out in 2012 and last year, nearly £82bn was saved into schemes.

But the Department for Work and Pensions (DWP) has today announced it will review auto-enrolment in 2017 to look at ways to develop its success.

Here’s what the review will consider:

Multiple job holders: Currently, only those earning £10,000 a year are automatically enrolled but those who have multiple jobs each earning less than £10,000 aren’t eligible for a workplace pension.

Tom Selby, senior analyst at AJ Bell, said: “Shifting work patterns in the UK mean many people have several different employers. If their total earnings are above the earnings trigger then it seems logical that, if practical, they are brought into the scope of the reforms.”

Self-employed: As self-employment numbers have risen, there’s been a marked reduction in this group saving into a pension and they missed the scope for auto-enrolment. The DWP review will consider how the growing numbers of self-employed people can be helped to save for their retirement.

Age criteria: Eligible jobholders aged 22 to state pension age who earn over £10,00 can be auto-enrolled. DWP will review the age criteria for when people will start to be auto-enrolled.

Auto-enrolment thresholds: As above, only those earning £10,000 a year are automatically enrolled but contributions are based on ‘qualifying earnings’. The lower threshold is currently £5,824 and the upper limit is £43,000. Any earnings below the lower threshold or above the upper limit do not qualify for pension contributions.

Selby said reducing the earnings trigger from £10,000 may appeal politically to a government desperate to demonstrate it is on the side of the low paid but with higher contribution rates, some may struggle: “Many of these people will be struggling to make ends meet and so giving up 4% of their salary simply won’t be an option. It’s important that in expanding auto-enrolment policymakers consider the realities facing those they are trying to nudge towards saving for retirement.”

Charge cap: The review will look at whether the cap should be changed and if transaction costs should be covered by the cap. Selby said it’s critical the government doesn’t rest on its laurels when it comes to charges: “The reforms are centred on the idea most people won’t engage with their pensions, so a cap is necessary to ensure savers get value for money. However, policymakers need to ensure this does not become a race to the bottom. Charges are clearly part of the picture, but administration and service is also hugely important and comes at a cost.”

The government also announced that it will freeze the automatic enrolment trigger at £10,000 for the 2017/18 tax year so eligible workers who earn this amount or more will continue to be automatically enrolled.

Band earnings will continue to be aligned with National Insurance contribution rates – £5,876 for the lower limit of the qualifying earnings band and £45,000 for the upper limit.

Kate Smith, head of pensions at Aegon, said: “Freezing the annual salary threshold at £10,000 for another year should bring more people into pension saving, but with salaries flat-lining, we may need to consider going further.

“Auto-enrolment contributions are set to rise by 2019 to 8% of a band of earnings between £5,876 and £45,000, but that won’t be enough to give most people an adequate income in retirement. One simple way to increase contributions would be to gradually move to a position where the 8% is on all earnings with no initial earnings excluded.”

Smith added that the review must also address a “current injustice” which means some schemes don’t claim tax relief for low earners who do not pay income tax.

“With the starting point for paying income tax rising to £11,500 (2017/18), and the auto-enrolment salary trigger staying at £10,000, there will be a greater number of individuals who are auto-enrolled that don’t pay income tax. This makes it imperative that all schemes move to a ‘relief at source’ basis so low earners get the government boost they are entitled to.”

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