On the go: The pension contribution limit for non-earners should be significantly increased to help tackle the pension savings gap, Aegon has said.
Rules introduced in 2001 allowed those not currently earning, or those earning less than £3,600 a year, to contribute to a personal pension and receive tax relief.
The idea was to give non-earners a chance to contribute to a pension irrespective of their employment status, perhaps drawing money from other savings; and it allowed people to pay ‘third-party’ contributions into a non-earner’s pension.
While the standard annual allowance for tax-relief-eligible pension contributions is now £40,000, the contribution limit for non-earners has not changed since 2001. When the government’s 20 per cent top-up is accounted for, Aegon argued that the actual limit is just £2,880 a year.
It pointed out that, when first introduced, the contribution limit was around a fifth (21 per cent) of average earnings. Since it has not been changed in the past 20 years, that figure has dropped to just 12 per cent of average earnings. Had it risen in line with the growth of average earnings, the contribution limit would now be £6,400.
Linking it to inflation would have seen a similar growth, putting the contribution limit at £6,335.
Aegon argued that raising the limit would make a “significant difference” to the value of a pension pot at retirement for a member who had taken time away from the workplace, benefiting women in particular.
Assuming investment growth of 4.25 per cent, an individual aged 30 who took a five-year break from work and contributed the revised limit of £6,400 could have an additional £62,800 of savings on reaching the state pension age, compared with a member contributing the current £3,600 limit.
Kate Smith, head of pensions at Aegon, 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. With indexation against wage growth or inflation, the limit could be around £6,400 today.
“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 partner's pension”
