- Auto enrolment Review in 2017 pledged key reforms in the ‘mid 2020s’:
- Lower age threshold for auto enrolment to 18
- Remove lower earnings limit so that workers save into a pension on the first £1 of earnings
- The Extension of Automatic Enrolment Act received Royal Assent in September 2023…
- …but the required consultation has not yet appeared
- Auto enrolment earnings trigger and qualifying earnings review for 2024/25 published this week promises consultation ‘at the earliest opportunity’
- Reforms likely to fall on the next government to implement
AJ Bell head of public policy, Rachel Vahey, says:
“At a time when people are coming under severe financial pressure, these reforms have the power to boost their savings plans for later life and set them on course for a financially stable retirement.
“Lowering the minimum age at which someone first qualifies for auto-enrolment from 22 to 18 will capture millions of savers from an earlier age.
“Likewise, removing the lower earnings band could significantly boost how much people save for retirement – particularly those who don’t earn much, including part timers and women. Someone earning £15,000 could see their contributions soar from £700 to £1,200 a year – an increase of over 70%.
“Saving into a pension can be a tough ask financially. But the pain can be eased by starting early and saving as much as you can. These reforms promise to tackle these two points head on.
“Equally, the government are clearly aware that the measures will increase the cost of employer pension contributions paid by UK companies big and small. There is also a danger that some workers are put off by the idea of funnelling a larger part of their payslip into a pension, and decide to opt out of saving for retirement altogether. Those concerns mean the government is, rightly, keen to consult widely on the proposals in detail before bringing them into force.
“However, no consultation has yet appeared. Given the time involved in delivering that consultation and then implementing the changes with sufficient notice for employers, implementation of the new rules is likely to fall to the next government and the mid 2020s target will be tested.
“The government now needs to make good on its promises. Over six years after agreeing to these changes and five months after the Act has been passed, it now urgently needs to take the next step to helping people save in a pension and consult with the industry and others.”
How reforms could boost pension pots
- 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))
- Removing the lower earnings band of £6,240 means increasing pension contributions by just under £500 a year for most automatic enrolment pension savers*.
- Employers 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 as long as they are opted in
- Lowering age threshold and removing lower earnings limit could provide a boost of over £150,000 to someone’s pension pot over the course of a 50-year career, depending on investment growth*.
*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).
The combined impact of both proposed reforms could provide a £152,208 pension pot boost by 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, with a starting salary of £20,000 rising 2% a year.
