Signifies small but much welcome pension boost says Kate Smith, Head of Pensions at Aegon, as she comments:
“We welcome the Government taking steps to put more money in the pockets of hard-working individuals and making work pay. With the economy recovering better than expected post pandemic, the Chancellor has tackled the spectra of rising cost of living head on, by incentivising individuals to stay in work and encouraging them to look ahead to build a more financially secure future.
“Changes to the Universal Credit taper will be a welcome boost for those claimants in work, who will now be able to keep more of the money they earn.
“A rise in the National Living Wage to more than double the increase in the cost of living will enable people to benefit from increased pension contributions to their workplace pensions as a result of the money paid in through auto-enrolment.
“Individuals on the National Living Wage will welcome confirmation of a future increase in their hourly rate to £9.50 an hour more than double the increase in the cost of living. What they may not realise is that as a result of automatic enrolment, any rise in the minimum wage will also mean they benefit from increased pension contributions to their workplace pensions.
“Eligible employees earning over £10,000 a year (£192 per week) have a total of 8% of qualifying earnings paid into their pension, made up employer and employee contributions and tax relief. Based on an increase in National Living Wage to £9.50 an hour, employees working for just over 20 hours a week will meet the minimum income threshold to be enrolled in a workplace pension and automatically benefit from an employer pension contribution.
“Currently, minimum wage employees working full-time will have a total pension contribution of £798 per year*. This will increase to £884 with a rise in the National Living Wage to £9.50 meaning they will have an additional £86 going into their pension over the course of the year. While this might not seem a lot, even a small increase today with compound investment growth over many years will prove very beneficial to future retirement savings, especially for those just starting out in their careers.
“Now that the Government is finally addressing the so-called ‘net pay anomaly’ all low earners will be in line for a tax top-up on their pension contributions from 2025. Currently those employees who earn between the £10,000 a year auto-enrolment earnings trigger and the personal allowance of £12,570, who are saving in schemes using ‘net pay arrangements’ don’t receive any tax relief on their pension contributions. This means that they are effectively paying more than their counterparts saving in a pension scheme, typical personal pensions, using the alternative relief at source approach who benefit from basic rate tax relief. Resolving this anomaly puts all low-earning pension savers in the same boat regardless of the type of scheme they save in.
“Low earners will see the triple benefit of a higher National Living Wage, higher take-home pay and higher pension contributions.”