Low paid workers are among those who stand to benefit from plans to expand pension auto-enrolment rules.
The proposed changes, which are included in a Private Members’ Bill and are supported by the Department for Work and Pensions would abolish the lower earnings limit to qualify for auto-enrolment and lower the minimum age from 22 to 18. However, it is not yet certain when these changes will be introduced.
Currently, in order to qualify for auto-enrolment in a company’s pension scheme, you have to be at least 22 years old and with a monthly income that’s equivalent to £10,000 over a year. That means if you earn £834 a month, you need to be auto-enrolled, even if you don’t earn £10,000 from that role. So, for example, if you bring in £1,000 a month, but only work for six months of the year, your employer would still need to auto-enrol you in their pension scheme, as if you were to work every month, your annual salary would exceed £10,000.
Contributions are usually made automatically from any ‘qualifying earnings’ between £6,240 and £50,270 in the 2022/23 and 2023/24 tax year, at a rate of 8%. Employers are required to contribute at least 3% of qualifying earnings (though they can contribute more), with the rest being added by the employee. Read more about how auto-enrolment currently works in our article How does pension auto-enrolment work?
The proposed changes aim to help younger workers and workers on lower incomes by lowering the minimum age for auto-enrolment and getting rid of the £6,240 lower earnings limit. Abolishing the lower earnings limit means that workers and their employers would start contributing to the worker’s pension scheme from the first pound earned, rather than on the portion above £6,240. However, some schemes exist already without the qualifying earnings disregard, as it was up to the employer to decide at the outset what basis they wanted to set the scheme up on.
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Laura Trott, Minister for Pensions, said: “We know that these widely supported measures will make a meaningful difference to people’s pension saving over the years ahead.
“Doing this will see the government deliver on our commitment to help grow the economy and support the hard-working people of this country, particularly groups such as women, young people and lower earners who have historically found it harder to save for retirement.”
As mentioned, a timeframe for the changes to be implemented is unclear, though it is hoped that the DWP’s announcement of support for the bill could see them come into effect by April 2024. The bill will not immediately impact the letter of the law once passed. Rather, it will give the Secretary of State the power to change the age limit and lower earnings limit. It is likely that once these powers are granted, additional research and consulting will be carried out before any changes are made official, and they will likely be phased in rather than pushed out all at once.
Kate Smith, head of pensions at Aegon, notes: “To avoid an overnight change, it will be important to introduce this gradually over a number of years, particularly as we emerge from the current cost of living crisis. Otherwise, someone earning £12,480 would see their contributions double overnight.”
There are also worries that increased contributions won’t be enough to keep up with the rising cost of retirement. Read more in our article £12,800 annual income now needed to retire, say pension experts.