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Big reforms to the UK pension system, expected to boost the retirement pots of young workers by tens of thousands of pounds, may not be implemented until 2025, warn experts.
Young adults joining the workforce at 18 years old were identified as the biggest winners from changes enacted by the UK government this week.
Under the reforms, the age at which employers are obliged to enrol eligible workers automatically into a company pension will reduce from 22 to 18.
In addition, under the changes, minimum pension contributions from both employers and employees will gradually increase to 8 per cent of earnings from the first £1 of salary, rather than being based on 8 per cent of earnings over £6,240 per year, as is the case today.
Industry experts say 18-year-olds will be “double winners” from the reforms.
“[Over their working lives] they could gain £105,300 from the removal of the offset (£6,240), and a further £44,700 from being automatically entitled to an extra four years of pension contributions and investment growth,” said Steven Cameron, pensions director at Aegon.
“In total, this could lift their retirement funds at age 68 (their expected state pension age) by £150,000 (£55,700 in today’s money).”
However, young workers are cautioned that the changes would not be rolled out immediately, as the government has still to decide how the changes will be put in place.
“The next step is to implement the changes, and the expectation is that the government will consult on an implementation plan imminently,” said Aegon.
“We believe this should be carried out over two to three years, starting no later than April 2025 on a phased basis, so that employers and employees can get used to the increased contributions. Otherwise, someone earning £12,480 would see their contributions double overnight.”
Other experts noted that many employers were already making pension contributions for their staff well above the minimum level required under automatic enrolment rules.
“For these employers, the proposed changes may make little or no impact on the contributions paid to their employees’ pension pots, though they should still check that their pension design would continue to meet the revised minimum criteria for all their employees,” said Benjamin Roe, senior partner and head of DC consulting at Aon, a firm of pension consultants.
The changes to automatic enrolment, confirmed this week, come more than a decade after the policy was introduced.
Since 2012, more than 10mn workers have been brought into workplace pension saving through automatic enrolment, where both the employer and employee are obliged to contribute a combined 8 per cent of salary. However, only those aged between 22 and state pension age, currently 66, and earning £10,000 a year or more, are eligible to be automatically enrolled.
In spite of the reforms being widely welcomed, some industry leaders urged the government to go further.
“By making it a legal requirement for workers under 18 to be automatically enrolled and removing the lower earnings limit (LEL), millions of people will get a better pension when they retire,” said Nigel Peaple, director of policy and advocacy with the Pensions and Lifetime Savings Association.
“However, for savers to reach an adequate income in retirement, further increases [in contribution rates] are still needed over the next decade so they rise from 8 per cent today to around 12 per cent in the early 2030s.”
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