A Government-commissioned report has highlighted an "under-recognised" scheme that could increase Universal Credit claimants' award entitlement and provide long-term financial benefits. The update comes from the second pensions commission in its interim report, which has been tasked by the Government with examining whether people are saving enough for retirement through financial buffers such as private pensions and savings.
How pension saving affects Universal Credit
One means of support available to many working-age people that interacts with Universal Credit is the auto-enrolment system. This is a legal requirement meaning employers must sign up their employees to a workplace pension scheme. By paying into a pension in this way, Universal Credit payments could go up by the same amount.
The report explains: "The Universal Credit system generally incentivises pension saving for claimants as the amount of Universal Credit to which individuals are entitled increases as take-home pay net of pension contributions decreases." It adds: "This is because Universal Credit entitlement is calculated on net, rather than gross earnings, which means employment income is assessed after income tax, National Insurance contributions, and pension contributions."
Double benefit for claimants
The commission says claimants can get a double benefit through the scheme over time. The group says: "Households on Universal Credit can expect a higher award to offset increased pensions savings, while benefiting in retirement from the contributions made by their employer and the state."
The report explained which Universal Credit claimants could benefit from auto-enrolment. The commission said: "For Universal Credit claimants who earn less than their work allowance there is no incentive from Universal Credit to save into a pension as the amount of Universal Credit received will not be affected by reduced take-home pay. However, there is an incentive for those either not eligible for a work allowance or who earn above the amount of their work allowance to save into a pension."
"In their case, every £1 of pension contributions reduces their earnings for the purpose of calculating Universal Credit by £1. The Universal Credit taper of 55 per cent is then applied to the amount of earnings that were contributed to a pension. For some individuals, contributing £100 into a pension will therefore result in a Universal Credit award that is £55 higher."
How auto-enrolment works
Qualifying rules currently require individuals to be aged 22 and over and earning £10,000 or more to be auto-enrolled. The minimum contribution applies only to yearly earnings between £6,240 and £50,270. The minimum contribution is equivalent to 8 per cent of qualifying earnings, often made up of a 5 per cent contribution from the employee's pay packet and a 3 per cent contribution from the employer.
Legal changes were passed in April 2023 to extend these qualifying rules to anyone aged 18 and over and to remove the £6,240 threshold, so contributions are paid from the first £1 of income earned. However, this legislation has yet to be put into force.
The pensions commission is continuing its work looking at what changes are needed to ensure people have sufficient savings for their retirement. They are due to present a final report with recommendations to the Government in Spring 2027. The interim report is available in full on the Government website.
