Beware side effects of AE

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Auto enrolment (AE) has, by and large, been a success story. Opt outs have been fewer than predicted and we have had our 10 millionth employee auto enrolled according to figures recently released by The Pensions Regulator (TPR). It’s also been good to see TPR showing it means business by getting its teeth into a few unscrupulous employers that have flouted the rules.

The job is by no means complete, but it is certainly a huge stride in the right direction. It will make a big difference to comfort levels in retirement for many, especially for those young enough to benefit from the start of their careers, at a stage of life when pension savings have previously been low on the priority list.

But what about those at the other end of the scale? Auto enrolment will have a smaller benefit for those nearer retirement, and it could cause problems for those with protection or who have accessed benefits. Thankfully in 2015 the rules changed so that if an employee had enhanced or one of the fixed protections, the employer no longer has a duty to auto enrol them. Of course the employee still needs to tell the employer for them to know this – one to remember when clients change jobs.

The increasing concern will be for those who have triggered the money purchase annual allowance (MPAA) but are still employed. Currently AE contributions are a total of 5% of qualifying earnings. In April this goes up to 8% and the qualifying band widens. This means that the maximum required contribution for any employee will go from £2,015 to £3,509. All within the MPAA – and not by coincidence. (We can at least take some solace in relation to the MPAA’s existence in the fact it is very unlikely to ever drop below what can be required under AE.)

However, many employers will pay the percentage of the whole salary (if they are generous) or the percentage from the first pound earned to the upper band without the deduction in relation to earnings below the lower qualifying band. On this basis, anyone earning £50,000 will have a £4,000 contribution under AE in 2019/20, and if they earn a penny more will start hitting MPAA charges if they don’t opt out.

Clearly auto enrolment is a good thing and will benefit many. It is designed for those who wouldn’t otherwise be saving, or only at minimal levels. Those with lifetime allowance issues, or who are already accessing benefits, are not the target market, but could find themselves facing tax charges if not careful.

Senior Technical Consultant

Lisa is an Economics graduate who has been in the financial services industry since 2003. Prior to joining AJ Bell in 2014 she spent nine years working in senior technical and consultancy roles at a major SIPP and SSAS provider. Lisa is part of our Technical Team, responsible for providing regulatory and technical analysis to the business and outside world. She is also a regular speaker at adviser events.