Why the Government’s changes to pension auto-enrolment will benefit younger savers

The Government has recently passed an important piece of legislation, the ‘Pensions (Extension of Automatic Enrolment) Act 2023’, which could significantly impact young savers across the nation.

The Act, which received Royal Assent on 19 September 2023, grants the Government the power to:

  • Lower the minimum age for automatic enrolment into a workplace pension from 22 to 18.
  • Reduce the minimum earnings threshold at which employers must contribute to workplace pensions from £6,240 a year to just £1.

However, these changes are not immediate. The Government will now consult on how and when these powers could be used.

Financial benefits

According to estimates by financial services provider Legal and General, if these changes were to take immediate effect, the average 18-year-old man would have an additional £430,694 in their pension pot by the time they reach 65, compared to starting at age 22. For the average woman, this figure would be an additional £378,997.

Increased participation

Before the introduction of automatic enrolment in 2012, only 55 per cent of eligible employees saved into a workplace pension. By 2021, this figure had risen to 88 per cent.

The new legislation could further boost these numbers, particularly among young people, whose participation has already more than doubled from 35 per cent in 2012 to 86 per cent in 2021.

Current auto-enrolment rules 

As it stands, auto-enrolment applies to those aged between 22 and the state pension age, currently 66. The eligibility depends on your annual earnings:

  • Earn £10,000 or more – Automatically enrolled, with a minimum total contribution of eight per cent of your earnings.
  • Earn between £6,240 and £10,000 – Can opt-in, with the same eight per cent total contribution.
  • Earn less than £6,240 – Can opt-in but are not entitled to employer top-ups.

However, each individual’s situation can be different, so it is important to consider the immediate financial implications against the long-term benefits before making a decision.

Our experienced team of advisers can help young savers make the decision that is right for them. Contact us today for expert advice

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Posted in IFA News.