Pension contributions: Expert reveals what should happen with them as living wage rises | Personal Finance | Finance
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The pension auto-enrolment system was introduced to make it compulsory for employers to automatically enrol eligible workers into a pension scheme. On top of this, the employer would then pay money into the scheme.
Recent analysis from Quilter has revealed that earnings and pension contributions often coincide in an unfortunate manner.
As Jon Greer, the head of retirement policy at quilter explained:
“The future increases in the living wage and its proposed extension to those from age 21 (targeted from 2024) could be used as an opportunity to coincide with increases in minimum pension contributions under automatic enrolment.
“The existing auto-enrolment rules have a lower and upper limit, creating a ‘qualifying earnings band.
READ MORE: State pension: Many unaware of benefit entitlement
“When the living wage goes up it feels like an opportune time to coincide with the removal of the lower limit on qualifying earnings.
“Because the lowest-paid workers will be getting a pay rise, thanks to the increase in the living wage, a small increase in the deduction made for their pension may not be as noticeable.
“Recent data shows that auto-enrolment opt-out rates have remained relatively low. However, the government has remained reluctant to tinker with the policy in order to raise contribution levels and extend participation.
Quilter calculated what would happen if the lower earnings band was removed and contributions were payable form the first pound of earnings.
They found that the increase in contributions would be the same for both income levels.
But the proportionate increase employee contributions for lower earners is much higher.
As Jon concluded: “Without an offset, the impact will be much more noticeable for the lower earner so it should be coordinated with an increase in the national living wage.”
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