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Millions of teenagers are expected to be brought into retirement saving in Britain following the parliamentary passage of landmark changes to workplace pension rules.
Employers are currently obliged to enrol workers automatically into a workplace pension plan, and make contributions to it on their behalf, only if the employee is aged 22 or older, and meets earnings’ criteria.
But reforms, which this week cleared parliament and received Royal Assent, provide for the workplace pension age limit to be lowered to age 18.
In addition, the changes will remove a salary threshold at which pension contributions are calculated, meaning auto-enrolled workers will potentially have hundreds of pounds contributed to their pension pots, from their salary and their employer.
“The ability to start saving four years earlier will boost the pension that people retire on by tens of thousands of pounds and, when combined with removing the lower earnings limit, the changes will make a significant difference to people’s retirement outlook,” said Standard Life, a pension provider.
Under the changes, the so-called “lower earnings band” or point at which pension contributions are calculated by the employer and employee, will be removed. Currently, this band is £6,240 a year.
Rachel Vahey, head of policy development at AJ Bell, an investment platform, said the changes marked a significant step in improving outcomes for millions of savers.
“Back in 2017, the government promised to make these fundamental changes to lower the age limit and count from the first pound of earnings,” said Vahey.
“Removing the lower earnings band of £6,240 means increasing pension contributions by just under £500 a year for most automatic enrolment pension savers. This could provide a boost of over £120,000 to someone’s pension pot over the course of a 50-year career, depending on investment growth.”
Jonathan Gullis, the Conservative MP for Stoke-on-Trent North, who introduced the private members’ bill to extend automatic enrolment, said the changes would boost the prospects for younger people.
“Nearly 25 per cent of people in Stoke-on-Trent North, Kidsgrove and Talke are not yet auto-enrolled on a pension plan, and this piece of legislation will ensure part-timers, women, apprentices and young people have financial stability in the long term,” said Gullis.
Before the introduction of automatic enrolment in 2012, just 55 per cent of eligible employees saved into a workplace pension. By 2021 this had risen to nearly 90 per cent, with an additional £33bn saved in real terms in 2021 compared with 2012, according to government figures.
Automatic enrolment currently obliges employers to enrol eligible employees aged between 22 and state pension age (66), and earning at least £10,000 per annum into a workplace pension. Under the rules of automatic enrolment, 8 per cent of an employee’s pensionable salary must be contributed to the workplace pension with at least 3 per cent coming from the employer.
The government is expected to launch a consultation on the details of the changes, including when they might come into effect, later this year.
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