Workplace pension contributions become unaffordable for low-income earners

Seven out of 10 low-income earners said the cost-of-living crisis has made pension contributions unaffordable.

Almost 70% of low-income earners say they cannot afford to make any contributions to their workplace pension due to the rising cost of living. This is according to research from Legal & General Investment Management, who interviewed more than 5,000 workers across the UK private sector and classified a low-income earner as someone earning £10,000 or less a year.

“Auto-enrolment faces arguably its biggest challenge, with rising prices squeezing household incomes and forcing millions to re-evaluate their finances – including their capacity to save for the long-term,” said Tom Selby, Head of Retirement Policy at AJ Bell, an investment platform.

Despite these claims, opt out levels remain stable, according to an analysis of Legal and General’s 4.7 million defined contribution scheme members.

“We know that for some people, paying in anything at all is out of the question right now. We need to be sensitive about this while doing whatever we can to make it as easy as possible for those who can contribute, to get into the habit of saving even small amounts, as early and regularly as they can,” Legal and General’s report stated.

Rita Butler-Jones, Co-Head of Defined Contribution at LGIM, shared a similar sentiment and encouraged employees to understand the workplace pension scheme in more detail before setting aside their own budget.

“It’s essential to ensure that as many people as possible understand pensions, such as the value of employer contributions and how those multiply over time, so they can make their spending choices on an informed basis,” she explained.

While contributing towards their pension is set to become unaffordable, Legal and General’s research found that there was a lack of education on the auto-enrolment scheme among younger workers.

Of the younger workers surveyed, almost two-thirds didn’t realise they could ask their employer to be enrolled in the scheme.

In addition to this, part of the reason why lower wage workers did not contribute to their pension pot was due to a “lack of information”. In fact, 38% of low-paid workers said their employer had not explained the eligibility rules for joining their workplace pension scheme.

Yesterday, Guy Opperman was removed from his position as Pensions Minister by Prime Minister Liz Truss.

“I was relieved of my duties on the day Her Majesty the Queen passed away. As a result I have respected the period of mourning until after Her Majesty’s funeral,” Opperman wrote in a letter to his colleagues.

Opperman had previously held his post for five years and highlighted his role in expanding the auto-enrolment scheme as one of his achievements.

“We have lifted automatic enrolment workplace pensions to 8% savings per annum. More than 10.5 million savers have been auto enrolled into a workplace private pension, with the biggest increases for young people and women,” he wrote.

However, Selby believes Opperman’s replacement will “have a tough act to follow”.

“Ensuring opt-outs are kept to a minimum will almost certainly be the main immediate priority for the next pensions minister. Over the medium-term the question of how to increase minimum contributions, without undermining participation, will need to be addressed,” Selby said.

Opperman backed Rishi Sunak against Truss in the last leadership election.