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20 Feb 2022

What the pension auto-enrolment trigger freeze means for your money

The DWP estimates 17,000 workers will save into their pension as a result
Young workers on a laptop

Thousands more workers will be automatically enrolled into a pension as the government confirmed the earnings 'trigger' would remain at £10,000 from April.

The Department of Work and Pensions (DWP) estimates this will bring 17,000 additional people into a workplace pension as wages continue to grow.

It means that an extra £26m could be paid into workplace pensions in 2022/23.

Here Which? looks at why the earnings trigger has been frozen at £10,000 and what it means for pension savers on a low income.

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What is auto-enrolment?

If you're over the age of 22, in full time employment, and earn over £10,000 a year, it's likely you were automatically enrolled into your workplace pension when you joined the company.

Auto-enrolment pensions were launched in 2012 and have a total minimum contribution of 8%.

Your employer must pay 3% as a minimum, though they may pay more. The remaining amount is paid by the employee - often 5%.

The minimum contribution applies to anything you earn over £6,240 up to a limit of £50,270 - known as the qualifying earnings band.

Each year the government reviews the automatic enrolment earnings thresholds - which includes the qualifying earnings band and the qualifying earnings trigger.

By the end of December last year, over 10.6 million workers had been automatically enrolled and over 1.9 million employers had paid into auto-enrolment pensions, according to the report.

Earnings trigger will remain at £10,000

On February 8 the DWP confirmed the earnings trigger would remain at £10,000 for the 2022/23 tax year.

It said this represents a 'real terms decrease' in the value of the trigger and as earnings continue to grow, it would bring 17,000 workers into pension savings, when compared to increasing the trigger in line with average wage growth.

The DWP said the decision reflected the 'need for stability' in light of 'challenging economic circumstances' from the pandemic.

It said the decision reflects a key balance which needs to be struck between affordability for employers and individuals, and giving those that can save the opportunity to build up a meaningful level of savings for retirement.

Lower and upper limits frozen

If you earn below £10,000, but more than £6,240, you won't be automatically enrolled into your workplace pension, but you can still choose to opt in, and your employer will have to contribute towards it.

The qualifying lower limit of £6,240 will remain the same in the 2022/23 tax year.

In its 2017 review into auto-enrolment, the government pledged to remove this lower earnings limit by the 'mid-2020s' as a way to bring even more people into workplace pensions.

The recent review acknowledged this and said it would continue to pay close attention to the impact and costs of making changes and consider the best approach on implementation.

MP for pensions Guy Opperman said in September earlier this year that these measures are due to be implemented during the 'mid-2020s'.

What groups will benefit most?

The review states that of the estimated additional £26m total contributions from all proposed threshold changes, one third comes from individuals aged under 30.

It also said women were estimated to make up the majority of the new auto-enrolled with seven in 10 benefitting, as they tend to earn less.

A report from last year by pension provider Now Pensions found that 2.8 million people were missing out on a workplace pension, up from 2.5 million in 2020.

The groups of people most impacted include women, ethnic minorities, people with disabilities, carers, and single parents.

Now Pensions said auto-enrolment is not suited to help employees who take significant career breaks, work in multiple and or part-time jobs or frequently move between jobs.

The under-pensioned groups are much more likely to be ineligible for auto-enrolment and this widens the pension and savings gap.

Campaign to reduce thresholds further

There have been calls to remove the £10,000 earnings threshold that triggers automatic enrollment so more people can start saving for their pension.

A Private Members Bill, titled 'Pensions (Extension of Automatic Enrolment) Bill', put forward by MP Richard Holden, seeks to extend auto-enrolment to workers aged 18 and over and remove the £10,000 earnings trigger.

Mr Holden said the bill would help employees who have two jobs both with an annual salary of £9,000. He said although that employee has a total annual salary of £18,000, they do not meet the criteria for automatic enrolment.

He also said students with part-time jobs and those entering employment after education would benefit, as 18-year-olds currently have to wait until they are aged 22 to be automatically enrolled.

The bill is due to have its second reading in the House of Commons on the 25th of February.

The DWP told Which? it would 'study the content of the Private Members' Bill closely'.

What if you can't afford pension payments?

If you're a low earner and will soon qualify for auto-enrolment, it may be tempting to opt out - but you should consider the below first.

You could miss out on 'free' money

Putting £100 into your pension will only cost you £80 if you're a basic rate payer. This is because you get tax relief at 20%.

Your employer also tops up your pension but they won't do this if you opt out.

You can take your personal pension earlier than state pension

You can currently begin to take money out of your private pension savings from the age of 55 - this will increase to age 57 in 2028.

This is earlier than you will be eligible to receive your state pension, which is currently age 66, but it's due to go up again to 67 between 2026 and 2028 and to age 68 between 2037-2039.

You need more to retire than you think

Our retirement survey from last year found a household of two need at least £26,000 a year to retire comfortably. And a single retired person would need £19,000.

The earlier you start saving, the more you will have when it comes to retirement.

Get free pension advice

You can get free, impartial guidance from Money Helper. If you're aged over 50 you can book a free guidance session with a specialist.

You can contact Money Helper on 0800 011 3797 or visit its website.

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