Government plans shake-up for pension auto-enrolment
The much-anticipated auto-enrolment review seeks to drop the eligibility age from 22 to 18 and reduce the lower earnings limit from £5,876, so contributions start from the first pound of an employees’ earnings.
The Department for Work and Pensions (DWP) wants to see these changes come into effect from the mid-2020s.
Lowering the auto-enrolment eligibility criteria
Currently, to be eligible for auto-enrolment, you need to be aged between 22 and State Pension Age, and you need to earn at least £10,000 (known as the pensionable income) per year from a single job. So, if you have multiple jobs but collectively, your earnings are below £10,000, you won’t be auto-enrolled.
If you’re under the age of 22 or above the State Pension Age (65 in 2017) and earn less than £10,000, you can still ask to join a workplace pension, but you won’t be automatically enrolled.
Another threshold employers need to be aware of is the ‘Qualifying Earnings’ figure which relates to the minimum contributions which have to be paid. This is currently £5,876 while the higher amount is £45,000.
Someone earning £5,876 or under is entitled to join a pension scheme but the employer doesn’t have to contribute. An employee earning between £5,876 and £10,000 (the pensionable income) is also entitled to opt in to the auto-enrolment scheme but the employer must contribute.
The DWP plans to remove this lower earnings limit so that people earning less than £5,876 would be entitled to employer contributions if they choose to opt in, and would themselves contribute to a pension from the first pound of their earnings.
While workers aged 22+ who fulfil the other criteria are auto-enrolled, those aged 16-21 or 65-74 are allowed to opt into their workplace pension but you’re not eligible for employer contributions unless you’re earning £5,876 or above.
As part of the review, the DWP plans to lower the age limit to 18 while maintaining the upper age limit. This would meant those aged 18 to the State Pension Age would be auto-enrolled into a workplace pension scheme if earning £10,000+ a year. Those aged 16-18 and over State Pension Age would be allowed to opt in to their workplace pension scheme.
See YourMoney.com’s guide on Auto-enrolment for more information.
Impact of the auto-enrolment review
The report suggested that by removing the lower earnings threshold would create an additional £2.6bn in annual pension savings, with £1bn coming from employers, £1.2bn from employee contributions and £0.4bn in income tax relief.
By lowering the age limit from 22 to 18, the DWP estimates an extra 900,000 people will be eligible, meaning around £770m would be saved into a workplace pension.
These two reforms would mean an extra £3.8bn would be added in 2020/21.
Kate Smith, head of pensions at Aegon, said the moves are positive but should be introduced sooner.
“Reducing the age at which people will be enrolled is a welcome step and normalises pension saving from the moment people enter the workforce and should help kick start the saving habit at a younger age. It would be good if employers offered this choice now, rather than waiting till the mid 2020s when it will become compulsory.
“By April 2025, around the time these new changes will happen, someone on average earnings, paying the minimum contribution since October 2012, will have built up a pension pot of almost £18,000 (£17,978). Part of the key to getting people saving more will be for them to see that their savings are growing and starting to build towards a sizeable sum.”
Smith added that one in five people are now self-employed or in non-regular employment which means a growing segment of the workforce is excluded from auto-enrolment and in many cases, are not making provision for retirement.
“It’s therefore welcome news that the government will test ‘targeted interventions’ to get this important group saving as a default. For any intervention to be successful the benefits of sacrificing some income today, for a better income in the future need to be made clear. This is even more important for those who don’t benefit from employer pension contributions,” she said.