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Qualifying earnings significantly short-changing pension pots

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Qualifying earnings could be eroding savers’ pension pots by as much as £90,500. Eight percent contribution becomes just 3.4 percent for low earners due to the way auto enrolment contributions are calculated. Maximum amount any saver can receive is 6.9 percent

There's a call for the removal of qualifying earnings and for pension contributions under auto enrolment to be based on total salary as figures from the workplace pensions provider reveal that savers could be missing out on as much as £90,500 as a result of the way contributions are calculated. Workers who are automatically enrolled make phased contributions as outlined in the table below.

Date                                                                                   Employer Minimum Contribution        Total Minimum Contribution

Employers staging date to 30th Sept 2017                                           1%                                                          2%

1st October 2017 to 30th September 2018                                            2%                                                         5%

1st October 2018 Onwards                                                                       3%                                                          8%

But, the legislation states that contributions only have to be made on qualifying earnings. This is the name given to a band of earnings used to calculate contributions for automatic enrolment. For the 2014/15 tax year this is set by the DWP between £5,772 and £41,865 a year. This means that the first £5,772 of an employee’s earnings isn’t included in the auto enrolment calculation. For example, if a worker earns £20,000 their qualifying earnings would be £14,228. The maximum amount contributions can be based on is £36,093 (£41,865 minus £5,772) for the 2014/15 tax year. For somebody earning £27,000 a year, over 40 years of saving, basing auto enrolment contributions on qualifying earnings rather than total salary could mean that they miss out on as much as £90,549 of contributions and investment growth.


The effect of qualifying earnings on auto enrolment contributions based on an 8 percent total contribution


Annual Salary                                    Auto-Enrolment contribution taking into account the impact of qualifying earnings

£10,000                                                                                                    3.4%

£15,000                                                                                                    4.9%

£20,000                                                                                                    5.7%

£27,000                                                                                                    6.3%

£40,000                                                                                                    6.9%

£50,000                                                                                                    5.8%

£60,000                                                                                                    4.8%

Morten Nilsson, CEO of NOW: Pensions said: “Qualifying earnings has a corrosive effect on pension pots and misleads savers. The eight percent contribution rate is regularly quoted but the reality is nobody actually gets a full eight percent – the most anyone gets is 6.9 percent if they are exactly at the top of the earnings band, with somebody earning £10,000 only receiving a total contribution of 3.4 percent which is woefully inadequate. “Removing band earnings and basing contributions on all salary would help boost savings for all and would remove a great deal of the administrative complexity for employers.” Tim Sharp, Pensions Policy Officer at the Trades Union Congress, said: “The roll-out of auto enrolment has been a great success so far. But it is important that we iron out flaws in the system early on. “The use of a lower earnings band discriminates against the low paid who miss out on valuable employer contributions. For auto enrolment to live up to its potential to provide low and middle earners with good incomes in retirement, we need minimum contributions to go up in stages beyond current plans. We think there is a strong case for employer contributions to be paid on every pound of earnings.”


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