Automatic enrolment: the government has realised that young people need to be saving into pensions

The government has revealed new plans that in the mid 2020s, the minimum age for automatic enrolment will be lowered to 18. This will mean approximately 900,000 extra young people will start saving into workplace pensions, unless they opt out.

Currently, automatic enrolment begins at age 22 for all employees earning more than £10,000. Clearly even the government recognises the importance of saving into a pension, hence why it has extended the scheme to younger people.

 What is automatic enrolment?

Automatic enrolment means that employees who are not already taking part in a workplace pension scheme will also be included, unless they opt out. A small percentage of a worker’s income is taken and put into a pension savings pot. This is comprised of contributions from the worker, the employer and the government.

Opting out would mean losing contributions from the employer.

There is a minimum total contribution which is currently 2 per cent of earnings, made up of 0.8 per cent from the worker, 1 per cent from the employer, and 0.2 per cent from the government in the form of tax relief.

In April 2018, the minimum contribution will increase to 5 per cent of your salary, made up of 2.4 per cent from the worker, 2 per cent from the employer, and 0.6 per cent from the government.

From April 2019, this will rise to 8 per cent of income, made up of 4 per cent from the worker, 3 per cent from the employer, and 1 per cent from the government.

 Changes to the system

Lowering the minimum age for automatic enrolment isn’t the only change that the government is making.

Contributions are currently calculated as a percentage of earnings between £5,876 and £45,000. This means that some people with multiple jobs miss out on automatic enrolment, if they earn less than £5,876 in some roles but still earn more than £10,000 overall.

In the new system, a percentage of all earnings up to £45,000 will be part of contributions, rather than having the threshold of £5,876.

In addition, the current trigger point for automatic enrolment is £10,000. This figure will be reviewed each year.

Finally, the government will be looking into ways of encouraging those who are self-employed to start saving for retirement. There are 4.8 million self-employed people in the UK. Most of these workers miss out on automatic enrolment.

 Has automatic enrolment been successful so far?

Automatic enrolment has nearly doubled the number of people saving into a workplace pension, adding over 9 million to the total.

However, the average percentage of earnings which people put into workplace pensions has fallen. This means that many of those who have been automatically enrolled are only saving the minimum contribution.

Whilst more individuals are saving into pensions, many people are still not saving enough to have a sufficient income during retirement. The Department for Work and Pensions found that nearly 4 in 10 workers are not saving enough for retirement.

The average worker saves 4 per cent of their earnings into defined contribution pensions, which is far below the 10-15 per cent recommended by many.