If you have a workplace pension, then you’ll usually be paying at least 5% of your qualifying salary into a pension. In real terms, you’re only actually paying 4% yourself as the government is paying the other 1% in the form of tax relief. Thanks to Auto-Enrolment, if you’re eligible, your employer must pay a minimum of 3% too. Some employers will go above and beyond the statutory minimum so it’s always worth asking your HR department.
Often, employer contributions can be overlooked, probably because that cash has to be ‘locked away’ until you’re at least 55 (rising to 57 from 2028), but over a working lifetime that will amount to a lot. If you’re on a salary of £33,000, which is the UK’s average salary, then that’s £29,700 over 30 years.
On top of that, the money will be invested by your pension provider, where it has the opportunity to grow over time and benefit from compound interest as well as investment growth. Your contributions will also benefit from tax relief, so if you’re a basic rate taxpayer, a £100 contribution would become £125, including the basic rate tax top up.
What are the proposed Auto-Enrolment updates?
The current Auto-Enrolment rules mean that full-time and part-time employees are automatically enrolled in their workplace pension scheme if they:
- work in the UK;
- earn more than £10,000 a year;
- aren’t already a member of a suitable workplace pension scheme; and
- are at least 22 years old, and haven’t reached State Pension age.
However, in September, legislation was passed enabling the government to reduce the minimum age from 22 to 18. This law, passed as ‘The Pensions (Extension to the Automatic Enrolment) Act 2023’, also means workers can build up pension savings from the first £1 they earn, rather than on amounts over the current lower earnings limit of £6,240. This will enable more people to build up bigger pots.
What do these new pension rules mean?
- If you’re aged 18 to 22, you’ll be automatically enrolled into a pension by your employer.
- Your employer will pay a minimum of 3% of your salary a year into a pension on any earnings you make up to £50,270.
- There will no longer be a lower earnings limit of £6,240.
- If you earn £22,000 at age 18 and pay into a pension then at least £1,760 a year will be going into your pension pot. Over four years that’s an extra £7,040 (including tax relief), before compound interest and any investment growth. Use PensionBee’s Pension Calculator to work out how much income your pension pot could generate in retirement.
- The above changes are due to be introduced in 2024 however the government’s currently consulting with employers and pension providers.
What’s Auto-Enrolment?
Automatic Enrolment or ‘Auto-Enrolment’ is legislation that was introduced in 2012 and was phased in, starting with larger employers. Now all employers have to set up a workplace pension for all of their eligible employees. You can choose not to save into your company pension - and give up the free money from your employer - but you have to sign an opt out form. The government says that in the 10 years since the introduction of Auto-Enrolment, 10.7 million people have been automatically enrolled into a pension. Plus, the average earner’s pension savings have also gone up by 50%.
Someone who saves into a pension their entire career - which is now more likely thanks to Auto-Enrolment - will see their pension savings rise by 85%.
When can I start saving into a pension?
At the moment, the minimum age for Auto-Enrolment is still 22, but you can choose to start contributing privately into your pension sooner. Although The Bill was passed, the government will have to consult on how it’ll implement the changes, and when is best to introduce it.
- If you’re 21 or under and earn £6,240 or more in a tax year, you have the right to opt into your workplace pension scheme. If you choose to opt in, you’ll be entitled to the minimum level of employer contributions. If you earn less than £6,240 you can still ask your employer to give you access to a pension to save into. They have to do this, they just don’t have to make any employer contributions.
- Before Auto-Enrolment was introduced, 55% of employees saved into a workplace pension - now it’s 88%.
- An estimated £33 billion more was saved into pensions in 2021 compared to 2012 - that’s in real terms so taking account of inflation and what was already being saved.
- Women, young people and lower earners have gained the most with 89% of women saving into their workplace scheme, compared to under 60% in 2012. A further 86% of 22-29 year olds are pension savers, compared to 35% in 2012.
Samantha Downes is a Financial Journalist and has written for most national newspapers and women’s magazines. She is also the author of two finance guides and has set up the Substack PumpkinPensions to help guide people looking to save more towards their future.
Risk warning
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
