Workers saving into a pension through automatic enrolment (AE) could be £40,000 worse off in retirement due to the way minimum contributions are calculated, according to Now Pensions.

Analysis from the pension fund found that, when minimum contributions rise from 5 per cent to 8 per cent on 6 April, no AE saver paying the minimum contribution will be saving the full 8 per cent on their earnings.

This is due to the lower qualifying earnings threshold also increasing, by £104, which means that the average employee will not receive AE minimum contributions on the first £6,136 of their earnings each year.

A worker on an annual salary of £25,000 would only have £18,864 of their yearly wages counted when calculating their AE contribution.

Over 40 years of saving, this would wipe £40,200 from the average pension, based on a 25 year old’s average salary.

Commenting on the analysis, Now Pensions policy director, Adrian Boulding said: “Auto-enrolment is helping 10 million people save for their future, which is a huge step forward. However, the way contributions are calculated is leaving many short changed.

“The rules are especially unfair for part-time workers who have the same £6,136 taken off their earnings as their full-time colleagues.

“The government has an opportunity to give auto enrolled savings a shot in the arm by changing the way contributions are calculated. This is a measure we hope to see included in the Pensions Bill expected in the spring.”

Now Pensions calculated that, if minimum contributions remained at 8 per cent of qualifying earnings, the average 25 year-old male employee would have £125 added to their pension per month, instead of £166 per month.

For the average female 25 year-old worker, £111 per month would be added compared to £153 per month.

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