Workers aged 18+ could benefit from a hidden pay rise in future as new pension auto-enrolment rules get the go-ahead
Workers aged 18 and above may benefit from a 'hidden' pay rise in future as the Government now has the power to lower the age limit to be automatically enrolled into workplace pensions from 22 to 18. It can also now lower the minimum earnings threshold at which your employer must start paying in.
Below we explain what's happening.
For more in-depth analysis on pension auto-enrolment, see MoneySavingExpert.com founder Martin Lewis's blogs on How to get a hidden pay rise via pension auto-enrolment and Why opting out could be a huge mistake.
The Government now has the power to auto-enrol more people into pensions
A new piece of legislation called the 'Pensions (Extension of Automatic Enrolment) Act 2023' has today (19 September) been given the seal of approval to become law by getting what's called 'Royal Assent'.
Under this Act, the Government now has the power to:
- Reduce the minimum age to be automatically enrolled into a workplace pension to 18-years-old.
- Lower the minimum earnings threshold at which employers have to contribute towards workplace pensions from £6,240 a year to £1 a year. This doesn't, however, change the existing £10,000 minimum earnings threshold to be automatically opted into a workplace pension (see below for more on this).
Financial services provider Legal and General estimates that if the changes took immediate effect (which they won't), the average 18-year-old man saving into a pension now would have an additional £430,694 in their pension pot once they reach 65 compared to saving from age 22, while the average woman would get an additional £378,997 (based on assumptions, including contributing 8% annually and salaries rising each year).
However, there's no immediate change. The Government now needs to consult on how and when these powers could be used.
Auto-enrolment currently applies to those aged between 22 and 66
Under current rules, employees aged between 22 and state pension age (currently 66 – though this is rising) may be automatically enrolled into their employer's workplace pension scheme – a type of savings scheme to provide you money for retirement that can be accessed once you're aged 55 and over.
Whether you're auto-enrolled depends on how much you earn:
- Earn £10,000 a year or more? You'll be automatically enrolled into the scheme. The minimum total contribution towards your pension is 8% of your earnings –and your employer has to contribute at least 3% of this, with the other 5% coming from your salary (if your employer pays in more, you may be able to pay in less, as long as the total contribution comes to at least 8%).
- Earn between £6,240 and £10,000 a year? You won't be automatically opted in but you can ask to be. Your employer will have to pay in at least 3% and, again, the total must be at least 8% (so if your employer only pays in the minimum, you'll have to pay in 5%).
- Earn less than £6,240 a year? You're not entitled to employer top-ups. Here, you won't be automatically opted in, though you can ask to be. However, even if your employer agrees and you make your contributions, it can refuse to pay the 3% top-up.
In all scenarios detailed above, both you and your employer can voluntarily agree to pay in more, but there's no law in place forcing either of you to do so. See our What is pension auto-enrolment? guide for more info on how it works.
Before the introduction of automatic enrolment in 2012, just over half (55%) of eligible employees saved into a workplace pension. By 2021, the Government says this had risen to 88%, adding that auto-enrolment has particularly benefitted women, young people and lower earners.
The proportion of eligible women in a workplace pension has increased from 59% in 2012 to 89% in 2021, while the proportion of eligible 22 to 29-year-olds has more than doubled from 35% in 2012 to 86% in 2021.
How to check if you've been auto-enrolled
All employers have to offer a workplace pension to eligible workers. Your employer must write to you when you’ve been auto-enrolled into its workplace pension scheme. It must tell you:
- The date it added you to the pension scheme.
- The type of pension scheme and the company that runs it.
- How much it’ll contribute and how much you’ll have to pay in.
- How to leave the scheme, if you want to.
- How tax relief applies to you.
If you have already been enrolled, you'll also see deductions for your pension contributions on your payslip.
Auto-enrolment is a 'long-term gain' for your retirement, but there may be reasons for opting out
Auto-enrolment is essentially a hidden pay rise, so for most people it's worth having. However, that pay rise comes at a cost, as you'll have less in your pay packet at the end of each month, so it's worth thinking of auto-enrolment as a long-term gain for your retirement.
However, if you really can't afford to contribute to your pension, you could consider lowering your contributions, if your employer allows it and will still match it. If you're struggling to pay essential bills or pay for food, then not making contributions could be the right thing for you to consider.
You can choose to 'opt out' of paying into your pension, though you'll be automatically opted back in three years later. See Martin's warning on the risks of opting out.
Similarly, if you've very expensive debts, for example, payday loans or a high 40% overdraft interest, it's likely worth clearing these before you start to contribute to your pension. See our Debt Help guide for more on how to clear your debts.