Three jobs, no savings: the workers that pensions forgot

Auto-enrolment led to a tenfold increase in the number of defined contribution workplace schemes, from 2.1 million in 2011 to 21 million in 2019. In a defined contribution (DC) pension your savings are invested and the pot you get at retirement depends on how much you contributed and the performance of your investments. They are the most common form of pension now that final-salary schemes — also known as defined benefit (DB) schemes, which guarantee you a set income for life — are disappearing because the guarantees they offer are so expensive for companies to provide

Although you can opt out of an auto-enrolment pension, Nest, a workplace pension company, said that only 10 per cent of people do this. The wage threshold, and the fact that auto-enrolment is not available to the under-21s, means that there are still almost three million people without a workplace pension, according to the Pensions Policy Institute (PPI), a think tank, and the company Now:Pensions.

Danielle has been renting a home since she and Isabella’s father divorced in 2015, and most of her money goes on childcare or towards saving for a deposit to buy a house.

She said: “I’m 100 per cent hoping to save more for when I retire and I’m worried about being financially secure. I found it a lot easier to save when I was married, but with all the other things I have to pay for now pensions are the last thing on my list. I’ve been given more hours at work which I’m hoping will make it easier for me to save.”

Those most likely to have a private pension worth 15 per cent or less than the UK average - include the self-employed, single mothers, divorced women, ethnic minorities, carers and people with disabilities.

So why are they missing out and what could be done to help?

Single mothers

Parents, especially single parents, are more likely to be locked out of auto-enrolment because they have to fit work around caring responsibilities. This means they are more likely to have multiple jobs, or be self-employed, and are less likely to earn £10,000 in a single job.

PPI researchers found that 55 per cent of single mothers had pensions compared with 65 per cent of the overall population. Single mothers had an average savings pot of £18,310 compared with £80,690 for the population in general. They also said that retired single mothers in 2018 had an average income of £13,000 a year, including the state pension — 83 per cent of the average retirement income of £15,720.

Things could, however, become easier for working mothers as homeworking becomes the norm. In 2017, well before the pandemic and when only 6 per cent of employees were based at home, eight out of ten working mothers said they felt trapped in their job because it provided flexibility they could not find in jobs elsewhere. But the flexibility comes at a price, because there are also concerns that mothers who work from home are losing long-term career progression and having their work disrupted by childcare.

During the pandemic 9 per cent of single parents had to cut their hours or stop working to care for children who may have been home schooling. Some 62 per cent of single parents are women, the PPI said.

Divorced women

Some 59 per cent of divorced women have a private pension and they have an average of £26,100 saved.

Divorced women had an average annual retirement income of £13,410, including the state pension, in 2018 — 85 per cent of the national average, the PPI said.

Pension benefits are often overlooked in divorce proceedings, with many women missing out on income that they may be entitled to.

Nicky Hunter from Stowe Family Law firm in Newcastle said: “Pensions can be a difficult area. Pensions should be shared, but are often overlooked because you can’t always divide them in the way that you sell a house. It’s clearly established in law that if a wife was staying at home or having a career break, with the husband going to work, then the pension assets have been built up jointly.”

Carers

Those who take time out of work to care for a family member or friend also end up with smaller pensions. The average retirement income for a carer is £13,590 a year — 86 per cent of the national average, the PPI said.

Carers also risk missing out on the full state pension because they haven’t amassed the 35 years of national insurance contributions you need to qualify. You can get carer’s credit if you look after someone for at least 20 hours a week unpaid, which tops up your national insurance record.

The PPI and Now: Pensions said that an extra 300,000 people have missed out on workplace pension saving in the past 18 months thanks to the impact of repeated lockdowns, home schooling and increased domestic responsibilities. Workers who were furloughed, though, kept up their contributions because their employers could claim the money back from government.

What would help?

The Department for Work and Pensions estimates that 284,000 more women would be brought into auto-enrolment if the salary threshold was lowered from £10,000 to £6,240 in a single job, while a review in 2017 recommended that pensions contributions be paid from the first pound earned, instead of not applying for the first £6,240 of salary. Samantha Gould, the head of campaigns at Now: Pensions, said making both changes would bring in an extra £1.2 billion a year in pension contributions.

Self-employed pensions

The four million or so self-employed workers in the UK do not benefit from auto-enrolment because they are not employees, but it is still possible to save into a pension and get tax relief from the government.

Self-employed pension saving hit a record low level in the year to April 2020, according to HM Revenue & Customs, with workers contributing £840 million, down from £1.15 billion the previous year.

Some 29 per cent of self-employed people said their profits had fallen as a result of the pandemic and they had not been eligible for government help, according to the Resolution Foundation think tank.

Saving is so low among this group of workers that the tax breaks on pension saving by the self-employed accounts for less than 1 per cent of the total cost of tax relief. The government has said that it will extend the principle of auto-enrolment to the self-employed but there has been little progress.

If you are self-employed you can set up a personal pension and make contributions of up to £40,000 a year . You get tax relief on your contributions, so a £100 deposit will be topped up to £125 for a basic-rate taxpayer. You will have to choose your own pension company and pay it a fee for managing your investments, and choose where to invest your money or pick a fund to do it for you.

The government’s pension scheme Nest is available to self-employed workers. It charges 1.8 per cent on each new contribution to your pot and an annual management charge of 0.3 per cent. Pension pots are accessible from age 55, but this is rising to 57 by 2028. You can withdraw 25 per cent tax-free.

Make it up

If you had to cut back on pension savings during the pandemic, you can boost your pot once you become more financially secure. If you are employed, aim to pay extra into your workplace scheme, especially if your company will match any additional contributions. Saving into your scheme can be especially beneficial for higher-rate and additional-rate taxpayers, who will get 40 per cent or 45 per cent tax relief.

Once basic-rate taxpayers have maxed out any contributions they get from their employer, they could open a Lifetime Isa, which were set up to encourage people aged between 18 and 39 to save for a first home or retirement. You get a 25 per cent top-up from the government on savings of up to £4,000 a year as long as you do not use the money until after the age of 60. Withdrawals are tax-free.

If you cut back on pension saving last year and can afford to make a lump sum payment, beware of tax rules. You can normally contribute £40,000 a year into a pension and benefit from tax relief, but savers who have taken money out of their pot can have that allowance cut to as little as £4,000.

The “carry-forward” rule, which allows you to use unused allowances from the three previous tax years, can help. This is helpful for self-employed people with variable incomes, because they can make a large pension contribution during a good year to make up for leaner years. To get tax relief, your earnings must be the same as the contribution you wish to make — for example, if you want to make a £15,000 contribution, your earnings for income tax purposes also have to be £15,000.

If you are in a couple and one of you has taken a career break or a reduction in income, your partner can contribute to your pension. If you are not working, you can still pay up to £2,880 into a pension a year and get a 20 per cent government top-up of £720.

If you look after a child under 12, and do not pay national insurance contributions, register for child benefit, regardless of your income, as this is a way to build up your national insurance credits, which you need to get a state pension.

“Increasing your contributions is the most sure-fire way to build up your pot and it doesn’t have to be by much,” Maike Currie from the wealth manager Fidelity International said. “Anything you add now will pay off in the future.”

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