- New rules for automatic enrolment to become law as the Pensions (Extension of Automatic Enrolment) (No. 2) Bill receives Royal Assent
- Key reforms include:
- Removing the ‘lower earnings limit’ for minimum contributions, meaning the first pound of earnings will qualify for a matched employer contribution and tax relief
- Lowering the minimum age at which someone qualifies for auto-enrolment from 22 to 18
- Contributions should eventually increase by £500 for each automatically enrolled person, meaning an additional boost of over £120,000 to a pension pot over the savings lifetime of an 18-year-old*
- Saving for an additional four years from 18 to 22 could increase someone’s pension pot by over £45,000*
- Combined measures are forecast to increase total pension contributions by £2 billion per year in 2022/23 terms – or by £45 billion over 30 years (See Tables 4A and 4B: Impact Assessment (parliament.uk))
- The DWP has promised to consult on key points of the implementation, such as timescales, although questions still remain, with the impact on opt-outs and business costs likely to be of paramount concern
Rachel Vahey, head of policy development at AJ Bell, comments:
“These automatic enrolment changes have been a long time coming, but this week marks a significant step on the road to improving outcomes for millions of pension 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. Now is the time to make good on this promise by extending automatic enrolment to help people save more from an earlier age.
“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*.
“The best bit is that the employer must pay at least £187 of this, meaning everyone with a standard workplace pension that meets minimum requirements will get more money toward their pension from their employer. But they must stay opted-in to the scheme to benefit, and leaving the pension means they’ll be giving up that extra employer pension payment, as well as tax relief on their contributions.
“Lowering by four years the minimum age someone can be automatically enrolled is a boost for those yet to start work and could eventually lift their final pension pot by over £45,000*. It illustrates that, although these changes may seem small, they can provide a big pension saving boost to lower earners and younger workers in particular.
“The DWP now has to keep the momentum going. The next stage is to form a plan to implement these changes. This has to strike the right balance. Financial life is tough for many people right now, so changes need to be brought in at the right time and pace that supports pension savers and their employers.
“But the DWP cannot drop the ball, it needs to keep forging ahead as this new law will make a meaningful difference to people’s later financial lives.”
*Removing the lower earnings limit of £6,240 will mean an additional £499 of annual pension contributions (8% of £6,240, of which at least 3% must come from the employer and 5% from the employee, including tax relief) for those in a workplace pension with the minimum auto enrolment contribution and who earn in excess of £10,000 (the earnings trigger).
This additional contribution alone could grow to an estimated £120,591 at age 68, assuming the lower qualifying earnings limit is permanently abolished and would otherwise have increased annually by 2%, and a 4% annual investment return (net of charges). The individual is assumed to work from age 18 and retires at 68.
If an 18-year-old earning £20,000 starts saving 8% of their earnings, then they could save £386,508 by age 68, assuming contributions increase by 2% each year in line with earnings, the upper earnings limit also increases by this rate, and a 4% investment return (net of charges).
If the same person started saving at age 22 instead their pension pot would be £340,553 – £45,955 lower.