Govt urged to increase non-earners' pension contribution limit

The government has been urged to increase the pension contribution limit for non-earners, which has been frozen at £3,600 since 2001, to help address savings gaps including the pensions gender gap.

Aegon noted that whilst the standard annual allowance for pension contributions eligible for tax relief was £40,000, the limit for those who are not currently earning remains at £3,600 a year.

This also includes the government's 20 per cent top up, which Aegon argued effectively limits personal pension contributions to £2,880 per year.

The consultancy acknowledged that this can be useful for many non-earners who are able to contribute to a pension despite not earning, and also allows others to make third-party contributions into a non-earner’s pension.

However, it argued that the limit should be increased to reflect broader economical changes, noting that the £3,600 contribution limit was around 21 per cent of average earnings when introduced in 2001, but has fallen to around 12 per cent of average earnings.

If it had maintained the link to 21 per cent of current average earnings, the contribution limit would have increased to around £6,400.

Taking into account inflation over this period had a similar impact, increasing the limit up to a similar value of just under £6,400, which Aegon emphasised could make a “significant difference” to the value of a pension fund at retirement.

Indeed, analysis from the firm suggested that an individual who takes 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.

Aegon head of pensions, Kate Smith, commented: “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 partners pension."

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