The lowest paid employees in the UK might be saving too much into pensions because of auto-enrolment, according to the Institute for Fiscal Studies (IFS).

Research published by the think tank discovered that auto-enrolment participation rates among the least financially secure 3% of employees were above 90%.

“Given their current financial difficulties, it is not obvious that most in this group should be reducing their current gross earnings, even by 3%, in order to save for a pension,” the IFS said.

Under auto-enrolment, employees contribute a minimum percentage of their salary to their pension. This is then topped up by their employer. Currently the minimum total contribution is 8%, of which 3% must be paid by the employer.

Employees can opt out of making pension contributions if they want. However, the IFS found this was uncommon even among the least financially secure.

Pension participation rates among this group of employees, which includes those with little or no savings, in poor health and who are paid very little for their work, have increased from 22% before auto-enrolment was introduced in 2012 to above 90% now.

There is no sign that numbers have dropped since the minimum employee contribution rate rose from 1% to 2% in April 2018 and then to 3% last year.

“This is potentially worrisome, given that many of these individuals could be better off leaving their pension scheme (perhaps temporarily) in favour of higher take-home pay to, for example, boost current consumption, save for a ‘rainy day fund’ or pay off costly debts,” the IFS said.

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