Young workers could receive a £120,000 top-up to their pension under new auto-enrolment rules that came into effect today until retirement age.
More low-income earners and young workers aged 18 to 21 should be covered by automatic pension registration. However, the timing has not yet been determined and the changes are expected to be rolled out gradually to prevent people’s contributions from skyrocketing overnight.
The age limit for auto-enrolment will be reduced from 22, meaning young people who can benefit most from overall investment growth will start saving earlier.
Lifetime savings: Young workers could receive a £120,000 top-up to their pension until retirement
Meanwhile, the earnings range will be widened, currently between £6,240 and £50,270, on which workers, employers and the government will have to contribute at least 8 per cent to the pension.
The lower limit of this range will be removed, allowing people to save from the first pound of their income. The trigger for auto-enrolment is earning £10,000 or more.
How does automatic registration work?
Who pays what: Breakdown of minimum pension contributions for property taxpayers currently under automatic enrollment
Auto-enrolment requires employers to pay at least 3 per cent of your income between £6,240 and £50,270 into your pension, while employees pay 4 per cent and the government adds 1 per cent in tax relief.
However, many employers are willing to make 4 percent, 5 percent, or 6 percent matching pension contributions if you choose to save a higher proportion of your income.
Pensions industry experts welcomed the news that the Private Member’s Bill to extend auto-enrolment received royal assent today – pointing out that the government’s own analysis says it will increase overall contributions by £2 billion a year .
The government supported the bill and urged the changes by Jonathan Gullis, the Tory MP for Stoke-on-Trent North. He introduced it in the House of Commons and it was pushed through the House of Lords by former pensions minister Baroness Altmann.
The government first proposed the measures itself in late 2017, but warned at the time that they would not be introduced until the mid-2020s.
Young workers could receive a £120,000 top-up to their pensions
Number analysis by AJ Bell shows that every auto-enrolled worker’s contributions should eventually rise by £500 a year – including free employer money – which would give someone aged 18 a £120,000 boost to their pension pot by the age of 68.
This assumes permanent elimination of the lower qualifying income limit, which would otherwise have increased by 2 percent annually, and an annual investment return of 4 percent after fees.
AJ Bell says: “If an 18-year-old earning £20,000 started saving 8 per cent of his earnings, he could save £386,508 by the age of 68, assuming contributions increase by 2 per cent each year in line with earnings , the upper limit.” The return limit also increases by this rate, resulting in an investment return of 4 percent less fees.
“If the same person started saving at age 22 instead, their pension pot would be £340,553 – £45,955 lower.”
Rachel Vahey, head of policy development, added: “These automatic changes to enrollment have been a long time coming, but this week marks an important step towards better outcomes for millions of pension savers.”
STEVE WEBB answers your questions about pensions
“Back in 2017, the government promised to make these fundamental changes to lower the age limit and count income from the first pound.”
“Anyone who has a standard company pension that meets the minimum requirements will receive more money for their pension from their employer.”
“But they must continue to join the scheme to benefit from it and if they leave the pension they will have to forego their employer’s additional pension payment as well as tax relief on their contributions.”
“Although these changes may seem small, they can provide a big boost to retirement savings, particularly for low earners and younger workers.”
The change in pension contributions is likely to occur gradually over several years
Kate Smith, head of pensions at Aegon, said: “Today is a significant day in the auto-enrolment journey and for pension savers, particularly low earners and younger workers.”
“Contributions are based on the first pound of income rather than a range above £6,240.” [meaning] Contributions from both individuals and employers are increasing, leading to larger pension amounts later in life.
“Employees pay 5 per cent, so that’s an extra £312 a year, but after tax relief it’s just over £20 a month.” However, employer contributions add an extra £499 a year to this amount.
“The next step is to implement the changes and the government is expected to discuss an implementation plan shortly.”
“We believe this should be phased in over a period of two to three years, starting no later than April 2025, to allow employers and employees to become accustomed to the increased contributions.” Otherwise, a person earning £12,480 would see their contributions increase. double overnight.”
Smith added: “It is time to consider increasing auto-enrolment contributions to 12 per cent of earnings, split equally between employers and employees, with solutions for those on the lowest income.”
Changes benefit young people, women and low earners
Mel Stride, Secretary of State for Work and Pensions, said: “Thanks to auto-enrolment, we are enabling record numbers of British workers to invest in their financial future – with an additional saving of £33 billion in 2021 compared to 2012.”
“This bill will enable millions across the country to save more and sooner – increasing security in retirement and helping people achieve the retirement they have worked so hard for.”
Gullis says: “Auto-enrolment is a significant step forward and will significantly improve the financial resilience of young people, women and low-income earners in retirement.”
“Almost 25 per cent of people in Stoke-on-Trent North, Kidsgrove and Talke are not yet automatically enrolled in a pension plan and this law will ensure part-time workers, women, apprentices and young people have financial stability in the long term .’
Baroness Altmann said: “Improving pensions for low earners and young people is welcome news, but of course there is more to do.”
“This includes enrolling all workers earning less than £10,000 a year, particularly people – mostly women – with more than one job, each earning less than £10,000 a year, who currently do not opt out of auto-enrolment at all. “
“It will also extend the nudge principles to the self-employed to encourage them to take out a pension and help people consolidate small pension amounts that are left behind and sometimes forgotten when workers change jobs.”
“The idea of developing a “lifetime” pension fund that people take over could be a next step. “The government is currently discussing measures to address this issue.”
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