Written by Tom Selby, head of retirement policy at AJ Bell
Six years after an independent report backed the idea of expanding automatic enrolment, the government is finally getting the wheels in motion.
The proposal to ditch the lower earnings limit, currently set at £6,240, so the first pound of earnings counts for both a matched contribution and tax relief, should help more people build bigger retirement pots over their careers.
Similarly, lowering the age at which someone first qualifies for auto-enrolment from 22 to 18 will be a significant step in helping millions of young people benefit from the magic of compound growth.
Both of these reforms should be good news for savers but also come with significant risks. Most obviously, 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.
Businesses could also push back against the idea of committing more cash to their employees’ pensions given the pressures they are facing at the moment. It is therefore unlikely we will get any change to auto-enrolment until the current inflation crisis has abated.
Future challenges
Once these proposed reforms have been introduced, a future government will likely need to address the question of how to ramp up pension contributions even further. For large sections of the workforce, particularly those who came to pension saving later in their lives, an 8% contribution rate simply won’t deliver anything close to the standard of living they are hoping for in retirement. One option could be to scale up contributions as people’s salaries increase – a policy often referred to as ‘save more tomorrow’.
There is also the challenge of those who are not currently covered by auto-enrolment, such as people with earnings below the £10,000 ‘earnings trigger’ and the self-employed. Addressing low savings rates among the self-employed is a particularly tricky problem due to the lack of an employer to provide matched contributions.
In short: while auto-enrolment has been successful in dramatically increasing the number of people saving something for retirement, it is still only a job half done. Whether the reforms are ultimately viewed as a success will depend largely on what happens next.
