Change to ‘little-known’ pension threshold could let you save extra £62,000 for retirement

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A threshold which allows low earners to save towards their pension has not been increased in over 20 years. Doing so now could mean Britons are able to strengthen their retirement fund, according to Aegon.

Britons who are not currently earning, or have earnings below £3,600, are still able to contribute to a personal pension and receive tax relief.

This is due to a measure introduced back in 2001 as part of the new stakeholder pension rules.

Individuals are allowed to make pension contributions without evidence of earnings, and this is known as the ‘earnings threshold’.

The rule could potentially be useful for many non-earners who are able to contribute to a pension despite not earning, such as through their savings.

It also allows for other people to make ‘third party’ contributions into a non-earner’s pension.

For example, a working partner can make pension contributions of up to £2,880 on behalf of their spouse.

This could be useful if they leave employment to look after children or elderly relatives.

However, the limit has not increased since the rule was brought in, while the standard annual allowance for pension contributions eligible for tax relief is significantly higher at £40,000.

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The £3,600 threshold for low earners includes the Government top-up of 20 percent, which essentially means people can only contribute £2,880 of their own money each year.

The contribution limit of £3,600 was around a fifth (21 percent) of average earnings when introduced in 2001, according to Aegon’s analysis.

With no rise over the last two decades, this has now fallen to around an eighth (12 percent) of average earnings.

If the limit maintained the link to 21 percent of current average earnings, it would be around £6,400 today.

Alternatively, taking into account inflation over this period, the limit would have risen to a similar amount of just under £6,400.

Aegon believes increasing the limit to this amount could make a significant difference to the value of a pension fund at retirement age.

They calculated that if an individual took a five-year break from work at age 30, saving £6,400 compared to £3,600 into a personal pension could mean they have an additional £62,800 in their pension fund at state pension age, assuming investment growth of 4.25 percent.

Kate Smith, Head of Pensions at Aegon, has called for the threshold to be increased.

She said: “While the £3,600 pension contribution rule is helpful for those with no earnings to build up a pension, the limit has been frozen for the last two decades.

“Increasing this in line with either inflation or earnings could substantially help the pension saving for those without earnings or who take career breaks who often lag behind in their retirement savings.

“Increasing the limit to around this level could particularly help address the gender pensions gap which still persists as women take time out of work for childcare or wider family responsibilities.

“Increasing the amount and awareness of this little-known allowance may also encourage individuals to make use of it to pay into their partners pension.”

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