Pensions  

Aegon calls for pension contribution limit rise for non-earners

Aegon calls for pension contribution limit rise for non-earners
 

Aegon has called for a significant increase to the pension contribution limit for non-earners, which has been frozen since 2001.

The company said today (February 14) that the increase could help improve pensions saving among non-earners, as well as help close the gender pension gap.

The threshold for non-earners is £3,600, meaning that those earning below that, or not earning at all, can still contribute to a personal pension and receive tax relief through pension rules introduced more than 20 years ago.

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The standard annual allowance for pension contributions eligible for tax relief is currently £40,000.

But the £3,600 threshold includes the government top-up of 20 per cent, which Aegon said effectively limits personal pension contribution to £2,880 each year.

Analysis by the provider showed that this contribution limit was 21 per cent of average earnings when it was introduced in 2001.

That £3,600 is now 12 per cent of average earnings.

Aegon has called for the limit to be increased either by wage growth or inflation, both of which would mean the limit would be around £6,400.

Kate Smith, head of pensions at Aegon said that while the £3,600 pension contribution rule is helpful for those with no earnings, there are reasons for an increase.

Smith said: “Increasing the limit to around this level could particularly help address the gender pensions gap which still persists as women take time out of work for childcare or wider family responsibilities.

"Increasing the amount and awareness of this little-known allowance may also encourage individuals to make use of it to pay into their partners pension”

According to Aegon’s calculations, if an individual takes a five-year career break at age 30, saving £6,400 rather than £3,600 into a personal pension could mean they have an additional £62,800 in their pension fund at the state pension age (assuming investment growth of 4.25 per cent).

Gender pension gap

Research published last year showed the gender pension gap for over-55s widened by 17 per cent (or £26,673) in 2020, as the “disproportionate” effects of Covid-19 took their toll on women’s finances.

In 2020, the gender pension gap grew from £157,263 to £183,936, according to data published by the Centre for Economics and Business Research and equity release lender More2life.

As a result, the findings suggest women had to work an average of 54.5 years to reach the same level of pension savings a man could reach in 40 years.

This means that young women will need to save an average of £185,000 more during their working lives to reach the same retirement income as men, according to Scottish Widows.

Its latest Women and Retirement report found women currently in their 20s would have only saved around £250,000 by the time they retired. 

But men will have closer to £350,000 on average.

sally.hickey@ft.com