Huge change to pension rules for millions of workers – and some will be up to £159k better off
MILLIONS could be up to £159,000 better off in retirement after a big shakeup of pension rules.
Two key changes to pension auto enrolment schemes moved into the next stage today.
The proposed changes to the rules would lower the age at which people are automatically placed in a workplace pension to 18, rather than 22.
It will also axe the lower earner’s limit (LEL) and see a worker on any amount of income be able to save – as it stands a person has to earn at least £6,240 to be able to contribute to their workplace pension.
The Bill in which these proposals are in, the Extension of Automatic Enrolment Bill, headed for a third reading today in the House of Lords.
This is the next stage before the Bill, if passed, receives Royal Assent and becomes law.
Experts at Interactive Investor (II) have crunched the numbers and found the changes could have a hefty payout if they go through.
Someone earning £20,000 at age 18 and paying into their pension until they reach age 66, could get a retirement boost of £159,000 from the changes.
That’s up from £187,000 with the LEL and only starting saving at 22, to £346,000 with no LEL and starting saving at 18.
Whereas a worker earning £30,000 at 18 and contributing to a pension until they’re 66, could get a retirement boost of £199,000.
This is an increase from £321,000 with the £6,240 limit from age 22, to £520,000 starting when they turn 18 with no LEL.
These workings are assuming the standard 5% investment performance net of fees, contributions from age 18 or age 22, as well as 5% employee and 3% employer contributions, and a 2% annual increase in contributions.
Alice Guy, head of pensions and savings, at II said: “The changes seem small, but they could be life-changing for many workers, making it much easier to save enough for retirement, especially for poorer workers.
“It’s great news that pension auto-enrolment rules will now include the youngest workers, as well as including all earnings up to £50,270.”
Ms Guy went on to add that the changes are “particularly” good news for women and poorer workers who tend to struggle to save enough to retire.
She said: “Poorer workers are disproportionately affected by the current system that excludes lower earnings from automatic pension contributions.”
But, the changes are only one step in the right direction, according to the expert.
Under the auto enrolment rules, an employee has to be signed up to a workplace pension where a minimum total of 8% of their salary is contributed.
Ms Guy added: “It’s important to bear in mind that you may need to save more than the minimum pension amounts to achieve a comfortable retirement.
“In the future, policymakers need to consider increasing auto-enrolment percentages above the current rate of 8%, which is not enough for most people to achieve a comfortable retirement.”
Currently, employers must automatically enrol workers into a pension scheme and make contributions if they are aged between 22 and the state pension age and earn at least £10,000 a year.
As it stands, workers can still opt into their work’s pension scheme at 18 but it isn’t automatic.
The LEL, of £6,240, is the minimum level of an enrolled worker’s earnings on which they and their employer have to pay contributions.
It’s hoped that the lower earnings limit could help to bring more lower earners and people working part-time jobs into automatic enrolment.
The changes are still a way off at the moment and nothing will change until they are brought into UK law.
But a public consultation on how to implement the changes could begin later this year.
What is auto-enrolment?
Auto-enrolment is when you’re automatically placed into your workplace pension scheme, with your contribution deducted from your pay packet.
Bosses have had to automatically enrol staff into pension schemes since October 2012 to get workers saving for their golden years.
The only exception is if you’re under the age of 22 or earn under £10,000, in which case you have to ask to opt in.
A minimum of 8% must be paid into the pension, with you contributing 5% and your employer paying at least 3%.
Crucially, the contribution you make as an employee is deducted before tax – so the actual amount you’re putting away is less than it sounds.
For example, if you pay 20% tax on your earnings, and your pension contribution is £100, this only really costs you £80 as this is how much that amount would have been worth after tax.
While opting out of a workplace pension would increase your monthly salary, it’s best to only do this as a last resort, as you’ll have less in later life.
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