The Department for Work and Pensions (DWP) has announced a change to the age for automatic enrolment will be lowered from 22 to 18.
These reforms also encompass the removal of the lower earnings limit for minimum contributions. This development empowers workers to save more for their pensions over an extended period.
Under the new regulations, the first pound of earnings will now qualify for matched employer contributions and tax relief, providing substantial benefits to those entering the workforce.
While these changes have been long-anticipated, they have now received Royal Assent, making them law as of September 19th. The private members’ bill successfully passed its third reading in the House of Lords, resulting in millions of people in future being able to commence their pension savings earlier.
This pivotal legislation was initially introduced in the House of Commons by Jonathan Gullis and guided through the House of Lords by former pensions minister Ros Altmann.
In time, the extension of automatic enrolment will expand its reach, encompassing individuals aged between 18 and 22.
This crucial shift aims to make pension saving a standard practice among younger workers and potentially contribute to closing the gender pensions gap, as noted by Aegon’s Head of Pensions, Kate Smith.
Moreover, contributions will now be calculated based on the first pound of earnings, eliminating the previous band threshold of £6,240.
This alteration means that both individuals and employers will contribute more, ultimately resulting in larger pension funds during retirement.
The Department for Work and Pensions (DWP) will launch a consultation on implementing the new measures, ensuring that the transition is smooth and effective.
The DWP has emphasized that when combined with the Mansion House Reforms announced by the Chancellor in July, these changes to automatic enrolment could potentially boost the average earner’s pension by nearly 50% over their entire career.
Even a minimum wage earner could expect their pension pot to increase by more than 85%.
This news represents a significant stride towards financial security in retirement for workers across the nation.
While basing contributions on an employee's total earnings rather than specific income ranges would simplify matters, it effectively means any business who are paying total contributions of less than 8% may have to increase their contribution rates. Business owners should be aware that these adjustments could result in higher pension costs for some employees.
