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Govt urged to rethink ‘corrosive’ auto-enrol earnings rules

Policymakers are facing calls to rethink the way automatic enrolment contributions are calculated after experts raised concerns the current system penalises low earners.

Speaking during an MM Wired debate in London last week, Rowley Turton director Scott Gallacher criticised rules that mean the lower limit for contributions is based on banded earnings.

This means workers must receive, as a minimum, total contributions worth 8 per cent of salary from between £5,772 and £41,865.

Gallacher said: “Banded earnings is fundamentally flawed because, in simple terms, it is incredibly unfair. 

“It penalises the very young who should be starting a pension, older people who arguably should still be saving for retirement if they are still working and part-time workers who are typically women rather than men.”

He also suggested the original blueprint for auto-enrolment was “ridiculously complicated” and needed to be simplified.

Calculations from auto-enrolment provider Now: Pensions support Gallacher’s claim that the current system disadvantages those on lower incomes.

According to the firm, someone who earns £10,000 a year and is enrolled at the minimum level of 8 per cent will in fact receive total pension contributions worth just 3.38 per cent of their salary. This compares with 4.9 per cent for someone earning £15,000, 6.3 per cent for someone earning £27,000 and 6.9 per cent for someone earning £41,000.

Now: Pensions chief executive Morten Nilsson says: “Band earnings has a corrosive effect on savers’ pension pots.

“The reality is nobody actually gets an 8 per cent contribution. The most anyone gets is 6.9 per cent if they are exactly at the top of the earnings band, with somebody earning £15,000 receiving a total contribution of only 4.9 per cent, which is woefully inadequate.”

Earlier today, the Government revealed it is considering scrapping the link between the auto-enrolment earnings trigger and the income tax threshold.

However, Nilsson wants policymakers to go further.

He says: “Rather than tinkering with the earnings trigger our preference would be for all workers to be auto enrolled as soon as they start paying National Insurance and for contributions to be based on all salary rather than a band of earnings.”


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There are 2 comments at the moment, we would love to hear your opinion too.

  1. those using band earnings as a definition should have known this was coming if they didn’t they are not fit for purpose its the worst definition esp for SME.

  2. The rules for AE schemes right from the word go have been and still are an unnecessarily over-complicated mess, just as we’ve come to expect from just about anything designed and imposed by the government.

    It would have been far better just to stipulate that all employers must install a GPP scheme of their own choosing with simple eligibility criteria, contributions based on all earnings and integrated adviser charging.. Restore Contributions Insurance (WoP) and the facility for integrated life cover and the result could have been a recipe for success instead of what we have now.

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