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More people eligible to save into a workplace pension

Paloma Kubiak
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Paloma Kubiak

Thousands of workers will come under the scope of pension auto-enrolment, enabling many to save for retirement for the first time.

The Department for Work and Pensions (DWP) has frozen three important figures relating to who can be auto-enrolled into a workplace pension scheme.

This, combined with rising wages essentially means more people will come under the scope of pension auto-enrolment, providing a “small real terms boost for pension saving”, according to Steve Webb, partner at LCP, and former pensions minister.

DWP calculates an extra 17,000 people will be brought into the pension system as a result.

Automatic enrolment earnings trigger

In order to be eligible for pension auto-enrolment, workers aged between 22 and State Pension age need to earn at least £10,000 per year from a single job.

DWP has today announced this earnings trigger amount will remain unchanged, as is usually the case.

But employers also need to take note of a second threshold or ‘Qualifying Earnings’ figure which relates to how the minimum contributions are calculated in accordance with the auto-enrolment legislation.

For the 2022/23 tax year, the basic or lower annual earnings limit (Qualifying Earnings) has been frozen at £6,240 for the first time.

This will increase the amount of people who can save for their future as someone earning £6,240 or under is entitled to join a pension scheme. However, the employer doesn’t have to contribute.

An employee earning between £6,240 and £10,000 (the pensionable income) is also entitled to opt-in to the auto-enrolment scheme and the employer must contribute (currently 3%).

Further, DWP has also frozen the higher or upper limit of the Qualifying Earnings band for auto-enrolment for the 2022/23 tax year. This figure will remain at £50,270.

This means anyone earning between £6,240 and £50,270 will qualify for a ‘matched’ employer contribution. An employee will contribute 5% gross (4% net of tax relief) while the firm will pay 3%.

The DWP document stated: “The existing threshold of £10,000 remains the correct level and will not change for 2022/23. This represents a real terms decrease in the value of the trigger. Therefore, as earnings continue to grow, keeping the earnings trigger at £10,000 will bring in an additional 17,000 savers into pension savings when compared to increasing the trigger in line with average wage growth.

“The decision to freeze the AE lower earnings limit this year supports the principle of ensuring that everyone who is automatically enrolled would continue to pay contributions on a meaningful proportion of their income. It is consistent with the government’s ambitions to improve financial resilience for retirement, in particular among low and moderate earners. Freezing the LEL helps ensure pensions savings would be broadly maintained – and slightly increased – compared to last year.”

More pension saving

Steve Webb, partner at consultants LCP, said: “It makes a lot of sense to say that people who earn below £10,000 don’t have to be put in a pension, especially now that the state pension is over £9,000 and set to rise again in April.

“For the lowest earners, the state pension will be their main source of income in retirement. But for everyone else, building up a pension pot more quickly is important. By freezing the floor for Qualifying Earnings, DWP has ensured that as earnings rise this year, a slightly bigger cash sum will go into pension saving which is a small step, albeit on a very long journey, to more realistic levels of pension saving.”