Since the government introduced pension auto-enrolment in 2012, millions more workers have started saving for their retirement. Now, the government has confirmed plans to extend auto-enrolment to encourage a savings boost. The changes could have implications for both employees and business owners.
In a publication, the government has revealed key announcements following a review of auto-enrolment that started in 2017. The reforms are forecast to increase pension contributions by £2 billion a year.
3 key auto-enrolment changes to be aware of
1. The minimum age of auto-enrolment will fall from 22 to 18
Young workers could start saving into a pension much sooner. The government intends to lower the minimum auto-enrolment age from 22 to 18.
For employees, this could be a positive step. Saving for retirement from the outset of their careers could help establish positive money habits among workers. In addition, compound growth means early contributions have the potential to grow significantly.
For business owners, it could mean their outgoings will increase as they’ll also need to make pension contributions on behalf of eligible workers.
2. The lower earnings limit will be removed
At the moment, workers must earn at least £6,240 to be eligible for auto-enrolment. The government plans to remove this lower earnings limit, so workers will receive contributions from the first pound they earn.
This will boost pension contributions among those that are already paying into a pension. It will also mean low-income workers that haven’t previously benefited from a pension, such as those who work part-time while caring for children or older relatives, will automatically start paying into a pension and receive employer contributions too.
While more people saving for retirement is a positive step, there are concerns it could lead to an increase in the number of employees opting out.
Speaking to FTAdviser, Tom Selby, head of retirement policy at AJ Bell, said: “Ratcheting up contributions during a cost of living crisis could be the straw that breaks the camel’s back for some savers, who might decide they simply cannot afford to put money to one side for retirement.”
From an employer’s perspective, this change could, again, increase the amount they are contributing to employees’ pensions.
3. There could be a maximum limit on pension pots
As most employees are entitled to a pension through their employer, frequent job hopping could lead to individuals holding numerous small pensions. This may make it difficult to manage pensions effectively and understand if you’re on track to reach your retirement goals.
In its report, the government sets out initial plans to help savers manage multiple pots. Among the proposals is a maximum limit on the number of pensions a person can have. The report also suggests a central clearing house to make it simpler to consolidate pensions.
3 omissions from the auto-enrolment expansion
1. There is no timescale for the proposed changes
While reports suggest the government plans to implement the changes by the mid-2020s, the official document doesn’t set out a timescale. So, while young and low-income workers are set to benefit from auto-enrolment, it could be several years before they start contributing to pensions.
2. The minimum pension contribution will not be increased
Research suggests that minimum contribution levels are not enough to afford a comfortable lifestyle in retirement. A recent Scottish Widows report indicates a third of Brits could struggle in retirement because they’re not putting enough away during their working life.
Under the current rules, the minimum contribution is 8% of qualifying earnings, made up of 5% from employees and 3% from employers.
There have been calls for the government to increase the minimum pension contribution level to help close the gap.
3. Auto-enrolment won’t be extended to cover self-employed workers
Some organisations have called on the government to extend auto-enrolment to encourage self-employed workers to save for their retirement. However, support for the self-employed has been overlooked in the latest report.
Research from the Institute for Fiscal Studies suggests the number of self-employed workers paying into a pension has fallen over the last decade.
It also found self-employed workers that pay into a pension rarely change the amount they contribute. The analysis suggested a form of auto-escalation, such as a direct debit that increases in line with inflation, could help self-employed workers save more for their retirement.
Take control of your pension and retirement
While the change to auto-enrolment could mean more people are on track for a financially secure retirement, there are still challenges. If you want to reach your retirement goals, engaging with your pension sooner, rather than later, could allow you to identify the steps you need to take.
Please contact us to discuss your retirement aspirations and how we could help you create a tailored financial plan.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.
Advice on auto-enrolment pensions is not regulated by the Financial Conduct Authority.