Low earners better off without workplace pensions

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Low earners better off without workplace pensions

Low earners would be better off if they opt out of workplace pensions and rely solely on state benefits to fund their retirements, the president of the Institute of Chartered Surveyors of Scotland (ICAS) revealed.

Sir Brian Souter, who is also chairman of transport business Stagecoach Group, is calling on the government to review its arrangements for workplace pensions to ensure a better deal for the low paid.

His comments follow the latest official figures, which show that one million employers have now enrolled their staff into a workplace pension through auto-enrolment.

Sir Brian's analysis shows that it would take an individual who lives in social housing and has paid into a workplace pension all their working life, 48 years of retirement to be better off than if they had just claimed state pension and benefits.

Currently, all those earning more than £10,000 are automatically enrolled.

From April, the auto-enrolment minimum total contribution – now at 2 per cent - will increase to 5 per cent, with the employee paying 3 per cent.

One year later, it will increase again to 8 per cent, with the worker paying 5 per cent.

A total of £17bn a year will be going into workplace pensions by 2019 to 2020 because of auto-enrolment.

Sir Brian’s analysis shows that ignoring inflation, workers making the 5 per cent contribution could pay in £437 a year – a total investment of £17,500 over a 40-year working life.

Their employers would pay a 3 per cent contribution of around £262 a year or £10,500 over the same period, amounting to total contributions of £28,000.

The study shows that £8 a week contributed by those living alone may only generate an additional pension of £7 per week in retirement. 

Couples could be worse off to the tune of £7 per week or £364 per year.

The research is based on a person's retirement income of investing into a workplace pension based on earning the national living wage.

Sir Brian said: "While overall we support the concept of workplace pensions, we believe the government must look again at the deal they offer to the lower paid.

"It can't be right that a policy which aims to help people in retirement could actually result in the poorest getting poorer."

There are now more than nine million people auto-enrolled in a workplace pension scheme.

The Department for Work & Pensions (DWP) published in December its review of auto-enrolment, which will change the age workers are enrolled into workplace pension schemes from 22 to 18-years-old, and the way pension contributions are calculated.

A spokesperson at the DWP said that Sir Brian's analysis "makes assumptions that won't apply to the vast majority" of individuals.

He said: "It suggests that people will stay on the same income for their full working life, and does not take into account changes in employment, or lifestyle.

"The state pension provides a solid foundation, but in order to maintain their standard of living people will need to build up private savings for retirement and automatic enrolment is delivering this for millions of people."

Sir Brian added: "Everyone has the right to an adequate pension in retirement.

"Those contributing to a workplace pension should expect to be better off not worse off than those who simply choose to live from a state pension and means-tested benefits.

"The government needs to revisit the criteria to make the workplace pension a fairer deal for the low paid and to ensure they are rewarded for investing and not penalised."

According to Nathan Long, senior pension analyst at Hargreaves Lansdown, the interaction between benefits and savings can be complicated.

He said: "It is important that people are not made worse off by saving for their future, but potential solutions are challenging. Not everyone will rely on benefits for their entire life, so rolling back auto-enrolment isn’t really an option."

For William Burrows, retirement director at Better Retirement, anybody with aspirations to move out of benefits will probably benefit from a workplace pension in the long run.

He said: "I have long argued that just because someone doesn't have a lot of money, they should be treated as a second-class citizen, so I welcome anything that helps improve pensions for the less well off."

maria.espadinha@ft.com