Currently, if you’re at least 22 years old, working in the UK and earning more than £10,000, you’re eligible for auto-enrolment into your company’s workplace pension.
The knock-on effect is that most UK workers have started saving for their own retirement, in some cases for the first time. While this is fantastic, it’s important it doesn’t inspire false confidence, as there is still work to be done to push its positive impact further.
Lowering the age limit
Back in 2017, a review of the policy suggested reducing the age threshold from 22 to 18-years-old and removing the lower limit of the qualifying earnings band (currently £6,240) so that workers can build pension savings from the first £1 they earn. The Government had committed to implementing these changes following much debate.
Lowering the age limit to 18 would mean that millions of people would begin saving four years earlier. The impact these extra years would have on retirement savings is huge.
If the average 32-year-old had started to contribute to their pension at age 18, they would have an additional £11,300 more in their pot now, meaning they’d be on track to have a retirement income of £26,200 per year.
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If the lower limit of qualifying earnings band was removed too, then they would have an additional £53,000 in their pension pot, compared to the £195,000 they’d have, on average, in today’s set-up.
However, it was recently announced that the extension of the Auto-Enrolment Bill might not be implemented until the mid-to-later part of this decade, meaning millions of younger savers could miss out on contributions that will have a huge impact on their retirement.
If we were to delay the reforms to 2029, for example, Legal & General’s data indicates that an estimated £120bn would be lost from the nation’s collective retirement savings.
People not saving enough for retirement
We need to see these changes implemented at the earliest possibility. The urgency in effectively rolling out these reforms is compounded by the fact that not only are people currently not saving enough for retirement, but they also don’t realise it.
This means they have an inaccurate picture of what their future looks like.
Research from the Resolution Foundation has underlined this, revealing that the vast majority of workers (over 80%) are not meeting any of the ‘Living Pension’ benchmarks, a benchmark for the rate of pension saving needed to afford an acceptable standard of living during retirement.
Meanwhile, the Pensions & Lifetime Savings Association (PLSA) revealed earlier this year that the basic expenses associated with retirement had increased by almost 20% in the last 12 months alone.
This is all compounded by the fact that people in the UK are living longer, meaning their pension pot is likely to play a greater role in their retirement.
While kickstarting auto-enrolment earlier on in a person’s career is not a silver bullet that will ensure an adequate pension pot, it would give workers up and down the country a better chance of strengthening their pension pot in anticipation of funding a longer retirement.
The introduction of auto-enrolment was a dramatic shift in the way we approach retirement savings and illustrated that there was space for reform, improvement and evolution. Over a decade on, it’s important to ensure that we continue to learn from its roll-out and recognise that there are still aspects that can be improved to secure better retirement outcomes for savers across the country.
If we are to ensure that the positive impact sparked by the introduction of auto-enrolment has its maximum impact, we need to look for ways we can evolve it.
These proposed changes need to be implemented as soon as possible. Every moment counts.
Colin Clarke is head of product policy strategy at Legal & General
