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Government 'dithering' on pension reforms could cost low earners thousands
Government 'dithering' on pension reforms could cost low earners thousands
TUC
5 Feb 2019 United Kingdom Automatic Enrolment, Pension Reform, Savings
Key Details:
  • Government delays to pension reforms could leave low-paid workers thousands of pounds worse off, according to new TUC analysis.
  • The Government had pledged to remove the Lower Earnings Limit (LEL) - which would boost the retirement pots of low-income workers. But ministers are dithering and have only given a vague commitment to lower the threshold in the mid-2020s.
  • The LEL is currently £6,000, which means that the first £6,000 a person earns annually doesn’t count towards pension contributions. For the lowest earners, this is a high proportion of their income.
  • Removing the limit will therefore be particularly beneficial to the lowest paid and so should be done as soon as possible, says the TUC.
  • New TUC research shows that a delay of just six years could mean a worker earning £10,000 loses out on a sixth of the value of their pension pot. The losses include not only the missed contributions, but the investment gains foregone. 
  • Workers on annual earnings of £10,000 would see the amount saved in their pension every year more than double if contributions were calculated from the first pound of earnings.
  • If this was applied from 2022 rather than 2028, the added investment gains could boost their final pension pot by £12,000 in cash terms or approaching £6,000 accounting for inflation.
  • For a worker on annual earnings of £15,000, total annual contributions would rise by £500 with employer contributions soaring by 70 per cent.
For workers retiring in 40 years’ time, the differences are as follows:
Annual income Pension pot if limit changed in 2022 Pension pot if limit changed in 2028 Difference in cash terms Inflation adjusted difference
£10,000 £74,650 £62,390 £12,270 £5,560
£15,000 £115,710 £103,440 £12,270 £5,560
The dates of 2022 and 2028 have been chosen as earliest and latest years compatible within a 'mid 2020s' pledge.

*figures on contributions
Annual income Employee contributions with LEL Employer contributions with LEL Employee contributions without LEL Employer contributions without LEL
£10,000 £193 £116 £500 £300
£15,000 £443 £266 £750 £450

  • The analysis assumes that pension savings are invested 60% in equities and 40% in bonds with annual returns of 5% and 3% respectively.
  • The TUC’s policy calls for pensions for the lowest earners are:
    • Employers to take a bigger share of contributions – at least two thirds.
    • A route map to increased contributions amounting to 15 per cent.
    • A straightforward, cost-effective way for people to turn their savings into a secure lifetime income.
source: TUC Press Release
A51138261