Teenagers are set to get a retirement boost after parliament agreed to lower the workplace pension age limit from 22 to 18. Here we explain how auto-enrolment works and what the changes will mean for younger workers.
The retirement prospects for the UK’s youngest and lowest paid workers look brighter, following the announcement that the government is to extend the rules on workplace pension contributions.
All eligible workers aged 18 or over will be automatically enrolled onto their workplace pension and start putting money away for their retirement. The removal of the ‘lower earnings limit’ will also boost the value of those contributions and mean workers get a bigger top-up from tax relief and their employer.
The changes to could make a huge difference to the retirement pots of young people. An 18-year-old earning £20,000 a year, for example, could end up with an extra £159,000 if they carry on contributing to their pension until age 66, according to calculations from Interactive Investor.
In this article, we cover:
- What is auto-enrolment?
- When does auto-enrolment start?
- What are the qualifying earnings for auto-enrolment?
- What changes are happening to auto-enrolment?
- Can I opt out of auto-enrolment?
Read more: How much should I pay into my pension?
What is auto-enrolment?
Auto-enrolment laws are designed to get more people saving for their retirement.
UK employers must offer workplace pensions for their staff, automatically enroll those who are eligible onto the scheme and make contributions on their behalf.
The idea is that by automatically enrolling staff onto a workplace pension – without leaving it to them to sign up – more people will start saving for retirement sooner. This will improve their financial security when they are older.
Currently the minimum pension contribution is 8% of qualifying earnings. Your employer needs to pay at least 3%, with you contributing the rest – 5%, unless your employer pays more than 3%. However both you and your employer can make more than the minimum contribution.
To be eligible for auto-enrolment you need to meet age criteria and be earning more than £10,000 a year.
Read more: What does a pension pot worth £37,000, £150,000 and £500,000 give you?
When was auto-enrolment introduced?
Auto-enrolment was first introduced in 2012 and has been phased in gradually since then.
Initially only the biggest businesses had to participate. Since 2017 all employers have had to offer a workplace pension to their staff.
In 2012 only 55% of private sector workers saved in a pension, compared to 88% by 2021, according to government figures. The proportion of women savinginto a workplace pension also jumped around 50%.
If you are self-employed find out what is the best pension for self-employed workers?
When does auto-enrolment start?
Currently only workers aged between 22 and the state pension age are eligible for auto-enrolment.
However, once the new rules come into force the minimum age will drop from 22 to 18.
Read more: What is the UK state pension age and will it go up?
What are qualifying earnings for auto-enrolment?
Confusingly, contribution rates for auto-enrolment are based on your ‘qualifying earnings’ which isn’t the same as your actual earnings.
Qualifying earnings are those within a lower and upper range set by the government each year. Currently this is earnings between £6,240 and £50,270 which means that the maximum earnings that your pension contributions will be based on is £44,030 (£50,270 – £6,240).
However, when the lower earnings threshold is scrapped, qualifying earnings will be based on all earnings up to £50,270.
Read more: Four ways to boost your state pension
Who is exempt from auto-enrolment?
Currently you will be exempt from auto-enrolment if you don’t meet the age or earnings criteria.
This means workers under the age of 22 or over state pension age as well as those earning less than £10,000 a year.
If you want to pay into your workplace pension, but don’t meet the criteria for auto-enrolment, you can still ask your employer to add you to the scheme.
What changes are happening to pension auto-enrolment?
The Automatic Enrolment bill has just cleared parliament, meaning that the government will have the power to extendpensions automatic enrolmentto younger workers.
Here are the key changes:
- Reducing the minimum age from 22 to 18
- Removing the lower earnings limit. This will mean every pound earned up to £50,270 will be considered as qualifying earnings and be eligible for tax relief and employer contributions
Although the changes – which were originally proposed in 2017 – have now received Royal Assent, it is still unclear how and when they will be introduced.
A consultation will now need to be carried out to agree a timeline, although it is not believed to be before 2025.
The priority will be to strike a balance between increasing retirement savings with the ongoing cost pressures facing both savers and businesses.
Can an employee opt out of auto-enrolment?
If you do not want to pay into your workplace pension, for example if you don’t think you can afford the payment, you are entitled to opt out.
To opt out of your scheme you will need to complete an “opt out” form from your pension provider. Depending on your provider, you might be able to opt out online.
If you opt out within one month of joining the scheme, you’ll also get your contribution back, otherwise your money will be left invested in the scheme and you will only be able to access it when you reach the required age. This is currently 55, but is set to rise to 57 in 2028.
You can always opt back in again if you change your mind. However, it’s important to note that you will be auto-enrolled by your employer again in three years’ time as your circ*mstances might have changed.
Nobody can force you to save for retirement, but opting out is not a decision to be taken lightly. It might give you a bit more financial breathing space now, but over the long term is less likely to make fiscal sense.
What are the pros and cons of opting out of pension auto-enrolment?
Deciding to opt out of your workplace pension scheme is a big decision that could impact significantly on your future in retirement.
You will be essentially be forgoing free money from your employer and a tax boost from the government. As a result, you will have to work that bit harder to build a retirement pot when you start saving again.
Savings also compound over time so skipping a year or two could lower your returns further down the line. Here are the pros and the cons depending on your personal circ*mstances.
Pros:
- Opting out means you’ll get more take-home pay each month
- You can change your mind at a later day and rejoin the scheme if you wish
Cons:
- Miss out on contributions from your employer
- Miss out on tax relief on your pension contributions
- Need to save harder, later in life. By shortening the number of years you pay into a pension, you’ll lose investment growth and need to pay more into your pension yourself
Read more: Money’s tight, should I temporarily pause my pension contributions?
How can I check if I have been auto-enrolled into a pension by my employer?
The quickest way to check if you have been auto-enrolled onto your workplace pension is to check your payslip. You should be able to find both your contributions and your employer’s in the deductions section.
Alternatively you can ask your HR department.
Read more: A simple guide to pensions
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