Articles - Home schooling to retirement provision in one easy lesson


Like many parents I’ve been a supply teacher to my children over the past few weeks, mainly drafted in to help with maths - it’s amazing what you forget! This week was all about fractions and percentages so when the Department of Work and Pensions published data of workplace pension saving trends it was an ideal opportunity to apply some of that arithmetic.

 By Dale Critchely, Policy Manager, Aviva
 
 The headlines show the huge success of automatic enrolment (AE) in increasing pension participation rates. 19.2 million workers are now saving in a workplace pension, 88% of those eligible to be automatically enrolled. But the report reveals a lot more about the UK’s workplace pension landscape than just participation rates.

 The total being saved into the UK’s workplace pensions was £98.4 bn in 2019, of which £26.2bn was from employee pension contributions and £9.6 bn from tax relief. Assuming this is just the relief on employee contributions, this tells me that the average rate of tax relief is 26.8%. The proportion of relief going to higher rate tax-payers in workplace pensions must be roughly one third, with two thirds going to basic rate tax payers.

 The figures don’t tell me anything about the tax relief on the £62.6bn of employer pension contributions however. In the UK’s “exempt, exempt, taxed” system of taxation for pension contributions, investment growth and income in retirement, there’s no income tax or national insurance paid on employer pension contributions until retirement. This is where the majority of the £53bn of tax relief shown in HMRCs table PEN 6 actually sits. Relief on employer contributions is split between employees (32% for basic rate tax-payers, 42% for higher rate tax payers) and employers (13.8% for all tax payers).

 NICs relief incentivises employers to provide for income in retirement, as opposed to providing income today, but the tax and NICs relief employees enjoy means that we don’t have to pay an income tax bill today on an employer pension contribution we won’t receive for many years.

 The report also reveals a significant variation in the amount saved between public and private sector. The 4.8 million workers in public sector pensions enjoyed average contributions of around £8,400 per year. The average for the 14.4million in private sector schemes was around £4,000 per year.

 The gap between those employees on AE minimum contributions and those in more generous pension schemes is revealed by the fact that AE minimum contributions due rose by 60% between 2018 and 2019, but total private sector pension contributions increased by only 12%, and contributions to all schemes by only 3%. This points to around 24% of contributions in the private sector now coming from AE minimum pension schemes, although the proportion of members is likely to be greater.

 The challenge for AE clearly isn’t participation rates, but that contributions in the private sector aren’t where they need to be, and all stakeholders have a role to play in securing a solution. Providers and trustees need to engage employees with the idea of giving up pay today for a better tomorrow. Many employers have shown the way by maintaining high quality pension schemes and diverting pay into employer contributions. Government too has an important role, through the provision of tax relief, to ensure that the most generous pension schemes remain affordable to members.

 While the current focus is on immediate challenges, we need to ensure we don’t lose sight of the need for long term planning if we’re to ensure that those being home schooled today are going to be able to enjoy retirement in the future.
  

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