IFS: poorest workers paying into workplace pensions 'may be better off leaving scheme'

Large numbers of low income workers are struggling to get by while paying into their employer’s pension scheme.

We are nearly eight years on from the launch of auto-enrolment, where employers are required by law to open a pension for qualifying staff and contribute towards it. 

This workplace pension scheme was launched as a way of pushing people towards putting more cash aside to cover their retirements; as a nation we simply weren’t saving anywhere near enough even for a modest retirement, let alone sufficient amounts to cover some of those ambitions we may have for life after work like seeing more of the world.

And there’s no question the scheme has been incredibly effective, with more than 90% of those eligible staff members now members of a workplace pension scheme.

However, there are now concerns that the auto-enrolment scheme may have proven too effective, to the point that some paying into a pension are actually worse off as a result.

All you need to know about saving into a workplace pension

Saving into a pension

A new report from the Institute for Fiscal Studies (IFS) looked at the people saving into workplace pensions and divided them into five tiers based on how financially secure they are.

The bottom tier, those classed as the least financially secure, are those defined as having three of the following ‘difficulties’:

• Being in the lowest tenth of household incomes
• Being in the most materially deprived tenth of eligible employees
• Having less than £1,500 in liquid savings
• Having a long-standing health issue that limits daily activities.

Clearly, people falling into this category are in a testing financial position. Around 3% of the sample studied by the IFS, covering the 2018-19 financial year, were classed as being in this tier.

Now you might imagine that people in this position would be less likely to remain enrolled in a workplace pension. After all, they have very little breathing room should they be hit with unexpected bills or the like.

And yet that isn’t happening. More than 90% of eligible staff in this category are saving in a workplace pension, and that figure has actually gone up since the minimum contribution was raised from 2% to 5%.

This is quite the contrast from before the introduction of auto-enrolment, when a little more than one in five of the least financially secure people were saving into a workplace pension. 

Your complete guide to pensions

A better use of our money

The IFS suggests that the substantial increase in pension saving by those who are less financially secure is “potentially worrisome” and it’s easy to see why.

Of course saving for the future is important if you want to enjoy a decent retirement.

But the reality is that for an awful lot of people classed as financially vulnerable, the money they are saving in a pension each month could be put to better use right now.

Paying off debts is a good example.

If you are in an unstable financial position, then you are likely to be better off putting that 5% of your monthly salary towards paying off what debts you have before sticking that money in a pension pot.

It’s the same as with savings ‒ if you’re on a small income and have little in the way of savings, it’s a better idea to start building an emergency pot of cash you can turn to should you get an unexpected bill than locking money away that you can’t touch for decades.

There are some people who are arguably in a worse financial position as a result of saving in a pension.

A growing problem

This becomes even more concerning when you consider what lies ahead.

There are an awful lot of people in those less secure tiers who have been sensibly squirreling away money for their future, but who now face the prospect of job losses and wage cuts as a result of the fallout from Covid-19.

As a result, the Government now faces a difficult balancing act.

It needs to make clear to savers in this position that they do have the option of temporarily leaving the workplace pension scheme in order to shore up their day-to-day finances. 

But will that fatally undermine auto-enrolment itself?

Only time will tell.

What do you think? Is it worth considering pausing contributions for the most hard-up or is this a terrible idea? Share your thoughts in the comments section below.

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