Contribution thresholds

RMR

Hello, I've always been a member of an employers pension scheme and when I went self employed I set up a SIPP. Unfortunately, my work has pretty much dried up as a result of the pandemic but I have been lucky enough to get a part time job, for which I'm very grateful. I asked to join the employers pension scheme but when the contributions seemed very low I asked how they were calculated. I'm paid 4 weekly and it seems they take my earnings then deduct the minimum contribution threshold (£480) and then only calculate contributions on the remaining balance. Is this standard practice? If so, it seems to totally defeat the whole point of pension enrolment, which is surely to try to encourage people to make their own adequate pension arrangements, especially people on relatively low salaries. 

AlanP_2

Not necessarily standard practice but it is within the rules laid down for auto enrolment schemes. 

Some employers are more generous and base it on all your salary and some don't. 

Nothing to stop you calculating what your additional contribution at 5% would be and adding it to your SIPP to compensate a bit at least. 

hugheskevi

There are statutory minimum contributions set by legislation, which it sounds like your employer is operating. You can read more about that at this link.

Employers are free to contribute more than the minimum if they wish, but are not obliged to. Many employers operate statutory minimum contributions.

The idea is that for the lowest earners, State Pension will be sufficient and so there is no need to compel savings for these lower levels of income. As salary rises, more of an individual's income falls within the qualifying earnings definition and so they receive more pension contributions reflecting their (assumed) higher retirement income requirement.

Albermarle

Still seems a pretty mean thing for an employer to do though, even if it is legal .

badmemory

But we shouldn't forget that they can also get away with a top limit too.

Whilst they may think that the lower you earn the less you need in retirement it is not strictly true.  The new state pension means no pension credit which means no help with rent etc etc.  If you can barely pay your rent when working then you will certainly struggle when on very little more than a state pension.  There are going to be a lot of people now in their 20s & 30s who are going to get to retirement age going OMG OMG is that all but I have been paying in for almost 50 years.

badmemory

Albermarle said:

Still seems a pretty mean thing for an employer to do though, even if it is legal .

Yes it is - but wait until they start finding the ones that have been making deductions & not paying them in anywhere.

hugheskevi

Albermarle said:

Still seems a pretty mean thing for an employer to do though, even if it is legal .

Personally, offering statutory minimum pension contributions is exactly how I would want my employer to operate, on the important (but probable) assumption that only a Defined Contribution scheme is going to be on offer.

An employer setting contributions above statutory minimum limits my range of options to choose between pay and pension. I can easily change pay into pension, but not pension into pay. Hence the less an employer restricts my pension (ie gives high pay, low pension), the more options I have available.

There are tax consequences between individual and employer contributions, but if the employer offers salary sacrifice with all employer National Insurance added, then the tax consequences between offering salary and pension are neutral, thus enabling me the fullest possible range of options to choose my preferred pay/pension combination.

The above completely disregards that most people are not capable of planning for retirement, and there is almost certainly a social good for a benevolent employer to set a level of pension that is more likely to be adequate, but viewed from the perspective of a rational and well-informed individual, statutory minimum pension contributions in conjunction with salary sacrifice and full employer NI added make a lot of sense.