Debt Advice Help and Support

Low Earners Less Likely to Save for Retirement

Written by on 1 July, 2009

The Office for National Statistics (ONS) has produced a report in relation to lower earners and pension contributions. A clear correlation was identified between low earnings and a reduced likelihood of contributing to a pension plan in the report, released at the end of May 2009.

The report found that 21% of men and 32% of women with a gross earning of less than £300 per week were contributing to a pension plan provided by their employer. However, when surveying those within a higher earning bracket, the report told a very different story.

According to findings, 76% of men and 82% of women with gross weekly earnings in excess of £600 has an employer-sponsored pension scheme – a stark difference to those in lower paid employment.

It is also notable that a higher percentage of women contributed to an employer-sponsored pension scheme for both low and high income categories in these findings. A more thorough analysis of the figures revealed that the main reason for this was the higher proportion of women than men working in the public sector. Within public sector employment, the pension participation rates are far higher.

The Annual Survey of Hours and Earnings (ASHE) reported that there were 1.7 million full-time, male employees with gross earnings of less than £300 per week. Alarmingly, a total of 1.3 million (79%) of this figure were not members of a work pension scheme.

The same survey also showed that there were 1.9 million, full-time female employees with gross earnings of less than £300 per week. Again, the figures showed that a total of 1.3 million (68%) were not members of an employer-sponsored pension scheme.

Participation in occupational pension schemes has fallen dramatically. In 1979, 65% of all employees were contributing to their employer’s pension scheme. This figured dropped to 57% in 1995 and then 54% in 2004. The number of private sector employees who contributed to occupational pensions has also fallen from 40% in 1991 to approximately 25% in 2005.

The government estimates that as many as 7 million people aren’t saving a sufficient sum of money for retirement. Only 40% of those yet to retire are making provisions for this, yet as many as 80% claim that more than a state pension is required to enjoy a comfortable retirement and to combat higher living costs.

To make matters worse, contributions to a third of pensions cease after just 4 years. A continuation of this trend means that as few as 40% of pensions will still actively receive contributions within 10 years.

A reason cited for this problem was the high up-front charges. Whilst occupational pension schemes typically charge 0.3% to 0.5%, stakeholder pensions are able to impose a maximum charge of up to 1.5% per annum. It is believed that this rate needs to be reduced to encourage the amount put away and to improve investment returns. Whilst charges have fallen, it is believed that this is because of increased regulation and not competition within the sector.

The complexity and failing of the existing system has led to the passing of the Pensions Act 2008. Private sector pensions are to be reformed so that they meet the challenge posed by the dual problem of an inadequate pension provision and an ageing population.

It is proposed by the Act that an eligible employee should enter either a personal account or an employer-sponsored scheme. The employee will be expected to contribute a minimum of 4%, the employer a minimum of 3% and a further 1% will be added from tax relief.

Currently in the UK the ratio stands at four working people to one retired person. With an aging population however, this ratio could change to a higher percentage of retirees. While the effects of the new Pensions Act is yet to be seen, further measures may be needed to help combat this increase and prevent people struggling with debt and finance problems in old age.

Useful links: Debt Management | Bankruptcy

Related content:

1. Employment and Earnings Fall in May
2. Minimum wage set to increase
3. Living Costs too High for Seniors to Live Comfortably