On the eve of her budget later today, Rachel Reeves said last night that the UK’s minimum hourly wage for over 21 year olds will rise by 6.7% from April and for 18-20 year olds by 16%.
Kate Smith, Head of Pensions at Aegon, explains the hidden pension benefit of the increase in the National Living Wage from £11.44 per hour to £12.21 per hour, effective April 1, 2025.
She said: “Raising the National Living Wage to £12.21 an hour, a massive 6.7% increase, will bring much-needed financial relief for earners age 21 and over on the lowest incomes, significantly boosting their spending power and helping to alleviate the ongoing burden of rising living costs. In percentage terms, the increase is more than half again the most recent increases in national average earnings of 4.1% which is the increase state pensioners are in line for next April under the triple lock. It’s also almost 4 times the September inflation rate (CPI) of 1.7% used to increase most other benefits.
“A hidden benefit is that the increase in the National Living Wage will also have a positive impact on pension contributions, enabling employees to build up larger pension pots. An increase to £12.21 an hour (£22,222 pa based on a 35 hour working week) means employees on the National Living Wage who are auto-enrolled into a workplace pension will benefit from a total annual pension contribution of £1,278 a year, made up of their own and their employer’s pension contributions, meaning an additional £112 going into their pension over the course of a year.”
“The minimum wage for under 20s and apprentices remains lower than the new National Living Wage but in percentage terms, their increases from next April are even larger. 18 to 20 year olds will receive a 16.3% increase to £10 an hour. 16 to 17 year olds and those receiving the apprentice rate get the greatest percentage uplift of 18% taking them to £7.55 an hour. These uplifts reflect the government’s aim to equalise the minima for all adults regardless of their age.
“Longer term, the government is also considering opening up auto enrolment to employees aged under 22, who are currently excluded from pension saving. These increases in minimum wages make this even more pressing as currently, under 22 year olds are missing out on what would be a valuable employer pension contribution.”
“While welcome, the new minimum living wage still falls short of the real Living Wage which many employers have signed up to, at currently £13.85 an hour in London and £12.60 an hour for the rest of the UK.”
Also sharing her response to the news released last night, Claire Trott, Divisional Director Retirement Planning and Holistic Planning, St. James’s Place said: “The government’s increase in the national living wage to £12.21 an hour (£22,222 pa) will drive a rise in Auto-enrolment contributions for those impacted and will also reduce the increase in pay in their pocket a little as individuals will not only have to pay tax and national insurance on the increase but also £70 of pension contributions a year (35 hours a week worker). Having said that, they will benefit from an additional £42 a year from their employer.
“It should be noted however that many employers offer more generous pension schemes, and these figures would therefore be different.”
