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Changes To Auto Enrolment Set To Benefit Millions

Changes To Auto-Enrolment Set To Benefit Millions

Thursday, 30 November 2023

Automatic enrolment is set to expand again after a bill to grant two new extensions received Royal Assent in September 2023. Brought by Jonathan Gullis MP, the new bill could allow millions of people to save more towards their retirement and start saving at a younger age.

The auto-enrolment revolution

Having been introduced in stages between 2012 and 2018, auto-enrolment has since revolutionised the way employees save for their retirement. Subsequent changes increased total minimum contributions to 8% in April 2019, of which at least 3% must be contributed by the employer.

The latest updates add two more extensions to the scheme, abolishing the Lower Earnings Limit for contributions and reducing the age for automatic enrolment from 22 to 18 years. Maintaining the importance of making enrolment simple and streamlined.

Start young to maximise savings

The benefits of starting pension saving early are plain to see. With the wonders of compound interest and generous employer contributions, younger people can make a huge difference to their future financial resilience by contributing from a young age.

Indeed, the bill is popular among young people, with the age of auto enrolment being lowered receiving support from 86% of young people aged 11 to 27, according to a recent study.

Lower limit scrapped

The bill also includes the removal of the Lower Earnings Limit for minimum contributions, previously £10,000. Research from the Pension Lifetime Savings Association (PLSA) has shown that removing this threshold could improve retirement outcomes by between 7% and 13% for nearly three million people.

Significantly, under the new rules, the first pound of earnings will qualify for matched employer contribution and tax relief. Minimum pension contributions from both employers and employees will gradually increase to 8% of earnings from the first pound, rather than being based on 8% of earnings over £6,240 per year.

EQRS support the removal of the lower limit as this ensures people with multiple jobs who earn over the limit in total are included. However, care needs to be taken that those on a combined income of less than the limit, who may be better off not saving are helped with coming to the right decision.


Meaningful difference to people’s pensions

The Department for Work and Pensions (DWP) said the changes to auto-enrolment, combined with the Mansion House Reforms announced by the Chancellor in July, could result in the average earner’s pension increasing by nearly 50% across their entire career.

Minister for Pensions, Laura Trott, commented, “We know that these widely supported measures will make a meaningful difference to people’s pension saving over the years ahead.” At the third reading in the House of Lords, Baroness Ros Altmann stated the bill will “pave the way for half a million younger people and at least 2.5 million older workers to build bigger pensions.”

Risks to financial stability?

The PLSA’s research also looked at whether any low earners might be at risk of over-saving to the detriment of their present financial resilience. Specifically, it found that 300,000 people out of 3.17 million lower earners were potentially at a higher risk if brought within the scope of auto-enrolment.

Nigel Peaple, Director of Policy and Advocacy at the PLSA, said, “The £10,000 earnings threshold for automatic enrolment was employed to protect workers on the lowest earnings from saving for the future when they might be better off having more money in their pockets today. […] This research suggests it could be feasible to safely bring the majority of low earners into the automatic workplace pension savings system without significant detriment, provided there are also carefully designed policy measures to protect those at risk of over-saving.”

Implementation won’t be until 2025

Although the bill has received Royal Assent, implementing the changes will not happen overnight. The government is now working on an implementation plan, which industry professionals estimate will take place over the next two to three years.

Baroness Ros Altmann stated, “I look forward to the promised early consultation to confirm the details and timing of the regulations, which will see the provisions of the bill implemented by all employers.”

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