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11

ACA calls for overhaul of auto-enrolment thresholds

Open-access content Tuesday 25th November 2014 — updated 5.13pm, Wednesday 29th April 2020

The links between auto-enrolment eligibility and thresholds for payment of income tax and National Insurance should be broken to allow more low-paid people to save for a pension, the Association of Consulting Actuaries has said.

In a letter to the Department of Work and Pensions, David Everett, chair of the ACA's pension schemes committee, said the earnings thresholds in the scheme must be re-examined in the light of political pledges to increase the income tax personal allowance and slow earnings growth.

Under current rules, those who pay income tax are auto-enrolled in pensions schemes. Those who earn between the National Insurance threshold of £5,772 and the income tax allowance of £10,000 can be enrolled at their request, while those who earn less than £5,772 can ask to be included, but their employers can turn down the request.

Everett noted that, if current linkages were maintained, the earnings trigger would be £10,500 from next April in line with the tax-free personal allowance, while the lower limit of qualifying earnings, based on the NI threshold, would be £5,824.

Without changes this gap could increase, as both the Conservatives and Liberal Democrats have pledged to increase the income tax personal allowance to £12,500 in the next parliament.

Everett proposed that contributions instead be based on a 'meaningful' band of earnings, with administratively straightforward calculations.

'To this end we suggest the following: insofar as 2015/16 is concerned there is no further increase in the earnings trigger from its current £10,000 and that a slight reduction is explored,' he stated.

'We do not believe it essential for the earnings trigger to be related to an item that is currently used for payroll purposes.'

He highlighted the ACA's Smaller Firm's Pension Survey, which found that significantly reducing the earnings trigger in tandem with scrapping the lower earnings limit would not result in trivial contributions but would lead to more low-paid individuals being brought into auto-enrolment.

The letter was sent in response to the DWP's consultation on automatic enrolment earnings thresholds for 2015/16.

Meanwhile, in its response to the consultation, the National Association of Pension Funds said that, given the current economic circumstances, the earnings trigger should be frozen at £10,000 in 2015/16.

'The NAPF believes that in 2017, the scheduled review for automatic enrolment should be undertaken by an "Independent Retirement Savings Commission" that has a clear remit to define, measure and promote good retirement outcomes; it should be the responsibility of this commission to set and review the automatic enrolment threshold as a part of a full review of automatic enrolment in 2017,' an NAPF spokeswoman said.

This article appeared in our November 2014 issue of The Actuary.
Click here to view this issue
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