Much employment in the rural sector relies upon part time and seasonal work especially in agriculture and hospitality. Many part time workers, often women, will find themselves after a few weeks auto-enrolled in a pension scheme whether it is appropriate or not. Inertia being what it is, and a general belief that a private pension is a good thing often means these pensions are taken out without a second though as to whether they are appropriate or a goid means of pension saving. For many there is a high risk that they will need their be suitable, efficient or appropriate.
Why is this the case? Well for the part time worker there are the following points that may make it both inefficient and a potentially loss-making activity.
- Often part time workers earn below the income tax threshold meaning they have no tax relief benefit against their pension contributions.
- Part time work is often temporary meaning that if you enter your employer chosen pension scheme and the work ends you end up with a small amount in a scheme you no longer contribute to.. Although, this is transferable to another scheme.
- Fees can eat into smaller schemes disproportionately. I give the following example based on the auto enrollment my wife, who works part time, has been offered. The scheme has two charges, A monthly admin fee currently amounting to £21 a year and an investment charge of 0.3%. Whilst the charges are reasonable they currently amount to two week's contributions with hours and income likely to be less in the Winter.
The level of fees means that if she either moved jobs or was let go she would have a small amount of money in a scheme that would be eroded by fees before she could draw it out tax free in 15 year's time. She does have another NEST pension pot, but the fees on this are capped at 0.75% which being a percentage means the amount would drop as the pension scheme shrunk.
A fundamental weakness with this existing auto enrolment scheme for pensions is that it is automatic and often done with no consideration for the appropriateness of the investment or consideration of the issues described. This means that potentially many contributions are wasted and lost in a system that relies on the inertia of the employee doing nothing.