- Aegon calls for a significant increase to the pension contribution limit for non-earners, which has been frozen at £3,600 since 2001
- If this was increased by wage growth or inflation, the limit would now be around £6,400 a year
- Increasing the limit will go a long way in helping improve pension saving amongst many non-earners, especially women, helping to close the gender pension gap
People who are not currently earning, or have earnings below £3,600, can still contribute to a personal pension and receive tax relief through a rule introduced in 2001 as part of the new stakeholder pension rules. This allowed individuals to make pension contributions without evidence of earnings and was known as the ‘earnings threshold’.
However, while the standard annual allowance for pension contributions eligible for tax relief is currently £40,000, the limit for these individuals is still just £3,600 per year. This includes the government top-up of 20%, effectively limiting personal pension contribution to £2,880 each year.
The rule is useful for many non-earners who are able to contribute to a pension (perhaps through their savings) despite not earning. It also allows for other people to make ‘third party’ contributions into a non-earner’s pension. For example, a working partner can make pension contributions of up to £2,880 on behalf of their spouse if they pause paid employment to look after children or elderly relatives.
What could the limit be now?
Aegon analysis show that the £3,600 contribution limit was around a fifth (21%) of average earnings when introduced in 2001. With no rise over the last two decades, this has now fallen to around an eighth (12%) of average earnings. If the limit maintained the link to 21% of current average earnings, this would be around £6,400.
Alternatively, taking into account inflation over this period, the limit would have risen to a similar amount of just under £6,400. Increasing to this amount could make a significant difference to the value of a pension fund at retirement age for someone who has taken time out of the workplace and has no taxable income.
If an individual takes a five-year break from work at age 30, saving £6,400 compared to £3,600 into a personal pension could mean they have an additional £62,800 in their pension fund at state pension age, assuming investment growth of 4.25%.
Kate Smith, Head of Pensions at Aegon, comments:
“While the £3,600 pension contribution rule is helpful for those with no earnings to build up a pension, the limit has been frozen for the last two decades. Increasing this in line with either inflation or earnings could substantially help the pension saving for those without earnings or who take career breaks who often lag behind in their retirement savings. With indexation against wage growth or inflation, the limit could be around £6,400 today.
“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”