Young workers between the ages of 18 and 21 and those on low wages should benefit from an expansion of automatic retirement enrollment, although the timetable is not yet finalized.
The age limit for automatically signing up for a pension will be raised from 22, meaning young people with the most to gain from compound investment growth will start saving earlier.
Meanwhile, the income range, currently £6,240 to £50,270, on which workers, employers and the government pay at least an 8% pension contribution, is to be widened.
The lower limit of this bracket will be abolished, allowing people to save from the first pound of income.
Savings boost: Young people and low-wage workers stand to benefit from an expansion of automatic retirement enrollment
The government has backed a private member’s bill pushing changes from Jonathan Gullis, the Conservative MP for Stoke-on-Trent North.
He first came up with these moves himself in late 2017, but warned at the time that they wouldn’t be introduced until the mid-2020s.
Now the government says Gullis’ bill ‘will not result in any immediate changes’ but will give the Secretary for Work and Pensions the power to change the age limit and lower the qualifying income limit for the automatic registration.
“There will be a legal duty to consult and report on results to inform the approach and timing of implementation, before using these powers. This will help ensure that the strong consensus that underpins the success of auto-enrollment is maintained,” he says.
But the announcement raised hopes that the changes could be enacted at some point in the next year and begin to be phased in by April 2024, which is before the likely date. of the next elections.
How much are people supposed to save for their pensions now?
Under auto-enrollment, employers are required to pay a minimum of 3% of earnings between £6,240 and £50,270 into staff pensions. Government tax relief provides another 1 percent.
Workers must contribute at least 4 percent for their own account, and if they opt out, all of the above is lost.
The income trigger to be automatically registered for a pension under the above conditions is £10,000.
Retirement experts warn that a savings level of 8% is below what is needed for a comfortable retirement, and some are calling for a gradual increase to 12%.
> How much should you save for a decent retirement? Find out here
Who pays what: automatic distribution of minimum pension contributions for taxpayers at the current base rate
Gullis says automatic pension enrollment will benefit “dozens of young people across the country.”
He adds: “With all the evidence of the huge positive impact this can have, it’s obvious that we now need to extend automatic registration to people aged 18 and over.”
Pensions Minister Laura Trott said: ‘We know these widely supported measures will make a significant difference to people’s pension savings for years to come.
“By doing this, the government will fulfill its commitment to help grow the economy and support the hard-working people of this country, especially groups such as women, youth and low-income people who have always had harder to save for retirement.”
Gary Smith, director of financial planning at Evelyn Partners, said: “If these proposed reforms to automatic enrollment are passed, it would significantly increase the number of young workers saving in a workplace pension and the amounts saved by low-income people – making sure they save from the first pound earned.
STEVE WEBB ANSWERS YOUR RETIREMENT QUESTIONS
“Given the powerful effects of compounding returns, saving for early retirement is extremely beneficial and can prevent savers later in life from having to make up for lost time by channeling a large percentage of their monthly salary into their pension.
“The DWP’s support for this bill could help address the low savings rate of low incomes and is to be welcomed.
“The self-employed are now the cohort that could be left behind in terms of private pensions unless the authorities devise imaginative nudges to address it.”
Kate Smith, Head of Pensions at Aegon, says: “The next step is to agree on a timetable for implementing these improvements. With the next general elections due to take place no later than January 2025, we urge the government to start phasing them in from April 2024.
“Basing contributions on the first pound of earnings rather than anything over £6,240 will mean increased contributions from individuals and employers.
“Employees pay 5%, which works out to £312 a year, but after tax relief it’s just over £20 a month. But with employer contributions, this will increase to £499 per additional year.
“To avoid overnight change, it will be important to phase it in over several years, particularly as we emerge from the current cost of living crisis. Otherwise, someone earning £12,480 would see their contributions double overnight.
Michael Ambery, a partner at Hymans Robertson, says the government’s decision is a step in the right direction, but radical change is needed
“We would like there to be no income restrictions for contribution (starting from the first pound with no upper limit), with automatic registration being open to all whether employed or self-employed (including ‘gig’ savings), as well as the removal of any upper age limit.
“A review of the 8% minimum contribution levels, supported by the work of the Pensions and Lifetime Savings Association, is essential in this regard and we look forward to hearing from the Minister for Pensions and the Government in due course.”
Nigel Peaple of industry body PLSA supported the changes, but added: “We have also long argued that for savers to achieve adequate retirement income, further increases should be undertaken over the next decade to that auto-enrollment goes from 8 for pension contribution from around 12% today to around 12% in the early 2030s – split 50/50 between employers and employees.
Retirement income needs of single people (Source PLSA)
Retirement income needs of couples (Source PLSA)
Some links in this article may be affiliate links. If you click on it, we may earn a small commission. This helps us fund This Is Money and keep it free to use. We do not write articles to promote products. We do not allow any business relationship to affect our editorial independence.
