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Osborne’s £10k bonanza blunts pension saving nudge
by Brian Cantwell on Apr 09, 2013 at 08:43
It is not often that tax cuts prove a source of complaints, but the government’s signature move in this year’s Budget to raise the personal allowance to £10,000 has sparked some concerns over auto-enrolment.
The government had promised the allowance would rise to £10,000 by the end of the parliament, but chancellor George Osborne used last month’s Budget to bring it forward to 2014.
Since the auto-enrolment threshold is pegged to the personal allowance, that means fewer workers being auto-enrolled, an effect that jars with the government’s drive to stimulate pension saving.
It is difficult to pinpoint exactly how many people will be affected. The allowance hike will remove 200,000 of those aged between 22 and 75 (and so included in the auto-enrolment legislation) from paying tax. Given that many of those are already likely to be auto-enrolled by 2014, they would only drop out if they moved jobs.
Combined rises add up
However, add the effect from the more dramatic rise in the allowance, from £8,105 to £9,440 this week, and the combined impact is not insignificant.
‘Because the tax threshold has risen so quickly in the past few years, there’s a significant shortfall in the number of people who will be auto-enrolled, because wages haven’t risen as much in the same period,’ says independent pensions expert Ros Altmann.
Graham Vidler, director of communications and engagement at the National Employment Savings Trust (Nest), the government’s default auto-enrolment scheme, acknowledges the issue, but points out that although those savers will not be automatically enrolled, they can still enrol themselves.
‘Workers earning below the threshold still have the right to opt in to their employer’s scheme,’ he says. ‘If they earn more than £5,668, they’re still entitled to an employer contribution.’
He is right, but the whole rationale of Nest is based on inertia – enrolling people automatically and placing the burden on them to opt out, rather than the other way round – to get as many people saving as possible. A fair chunk of the lower paid, at whom auto-enrolment is targeted, are now no longer going to benefit from that ‘nudge’.
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