Automatic enrolment rules require employers to add all qualifying employees to a scheme and contribute at least 3% to their pension but, currently, only workers aged between 22 and 66 are eligible.
The bill will pave the way for the age to be lowered to 18, giving savers an extra four years' worth of contributions for their retirement pot. It will also remove the lower-earning limit (currently £6,240), which could mean current savers will face increased contributions in the future.
Here, Which? takes a closer look at the Extension to Automatic Enrolment bill, how much the change will impact pension savings for younger workers, and offers advice on how much you need to retire.
What will the changes mean?
The private members' bill, which cleared Parliament this week, will see two major changes come into force.
Workers can save from a younger age
eligible employeesThere are nearly 11 million people in a workplace pension scheme, but there are limitations at the point at which you’re automatically enrolled, based on your age and how much you earn.
You’ll currently qualify if:
The new bill will lower the age at which eligible workers must be automatically enrolled in a pension scheme from 22 to 18.
This will give savers an extra four years' worth of contributions for their retirement pot, provided they meet the remaining criteria.
However, it’s worth pointing out that those aged 16-21 currently still have the right to join a workplace scheme if they want to.
Lower earnings limit removed
Under current automatic enrolment rules, those who qualify have a minimum of 8% of earnings paid into their workplace pension, with employers having to pay at least 3% (although many pay more voluntarily) and employee contributions making up the remaining 5%.
However, your minimum contribution only applies to anything you earn over £6,240 and up to a limit of £50,270. This is called the qualifying earnings band.
This means if you were earning £25,000 a year, your contribution would only be a percentage of £18,760 (the difference between £6,240 and £25,000).
The new bill will remove the lower limit of the qualifying earnings band, so all contributions are paid from the first pound of earnings. This means going forward if you earn £25,000, your minimum contribution would be taken from your whole salary.
However, this may mean current savers will face increased contributions in the future.
Find out moreHow much could savings be boosted?
According to the online investment platform Interactive Investor, the changes will mean an 18-year-old worker earning £20,000 and paying into their pension until 66 could get a retirement boost of £159,000.
This would be boosted to £199,000 if the worker had a salary of £30,000 aged 18.
When will the new rules come into force?
The bill includes a statutory requirement to consult on the implementation approach and the timing, and the outcomes will have to be reported to Parliament.
Experts believe the changes could be several years away, due to the likelihood of the changes being staggered over time so employers and employees can get used to the increased contributions.
Kate Smith, head of pensions at Aegon, said: ‘We believe this should be carried out over two to three years starting no later than April 2025 on a phased basis so that employers and employees can get used to the increased contributions.
‘Otherwise, someone earning £12,480 would see their contributions double overnight.’
What if you don’t want to be automatically enrolled?
You can choose to opt out, however, you will miss out on employer contributions and tax relief, which is essentially free money.
Opting out isn't final, as you can rejoin at a later date. Also, employers will be required to re-enrol you every three years, so you can reconsider your decision.
Find out moreHow much will you need to retire?
According to our cost-of-retirement survey, a household of two needs an income of at least £28,000 a year for a ‘comfortable’ retirement that includes some luxuries such as European holidays and meals out.
To generate that income we estimate you'd need £115,000 to £131,000 in your private pensions.
Find out more:source https://www.which.co.uk/news/article/automatic-enrolment-changes-pension-savings-boost-younger-workers-aKCDd4D59Ha2