Two big pension rule changes that will help millions save more for retirement
MILLONS could save more retirement after two big pension rule changes were backed by the government.
Proposals which could lower the age at which people are automatically placed in a workplace pension to 18 are being backed by the Government.
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.
The lower earnings limit, at £6,240, is the minimum level of an enrolled worker’s earnings on which they and their employer have to pay contributions.
Removing the lower earnings limit could help to bring more lower earners and people working part-time jobs into automatic enrolment.
The Bill cleared its first hurdle after MPs gave it an unopposed second reading.
It will undergo further scrutiny at a later date and is on track to become law.
The provisions will not result in any immediate change, but will give the Secretary of State powers to amend the age limit and lower the qualifying earnings limit for automatic enrolment.
Minister for Pensions Laura Trott said: “We know that these widely supported measures will make a meaningful difference to people’s pension saving over the years ahead.
Gary Smith, director of financial planning at wealth management firm Evelyn Partners, said the proposed reforms would “dramatically boost” the amount being saved by low earners.
He said: “Given the powerful effects of compounded returns, early pension saving is hugely beneficial, and can prevent savers later in life having to make up for lost time by funnelling a large percentage of their monthly pay into their pension.”
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.
Meanwhile, there is concern 12.5million won’t have enough for retirement – we give six ways to easily and cheaply boost your pot.
Plus, we share a full list of free cash, discounts and freebies you can get on state pension worth up to £6,400.
Do you have a money problem that needs sorting? Get in touch by emailing money-sm@news.co.uk