A pensions Bill to help millions save more into their pension by lowering the age of automatic enrolment and scrapping the lower earnings limit has been given the go ahead.
On Tuesday, the Department for Work and Pensions confirmed the Private Members Bill had cleared Parliament and been granted Royal Assent.
Under current rules, workers must be between the age of 22 and state pension age and earn above £10,000 to be entered into the scheme. However, changes to the policy will see workers auto-enrolled when they turn 18.
Meanwhile, the lower earnings limit – the minimum level of earnings on which an individual and their employer have to pay contributions- will be abolished.
The government said the Bill will mean millions across the country can save more and save earlier, boosting security in older age.
Minister for Pensions Laura Trott said: “Automatic enrolment has been a phenomenal success and we are determined to go further. It’s great news that the Private Members’ Bill has successfully passed through Parliament and received Royal Assent.
“This will mean younger workers and those in lower paid employment will be able to fully participate in Automatic Enrolment. For the first time, every eligible worker will benefit from an employer contribution from the first pound earned – which will make a huge difference to their eventual pension.”
According to analysis by AJ Bell, saving for an additional four years from 18 to 22 could increase someone’s pension pot by over £45,000. Furthermore, reducing the lower earnings band means increasing pension contributions by just under £500 a year for most automatic enrolment pension savers.
The combined measures are forecast to increase total pension contributions by £2 billion per year in 2022/23 terms or by £45 billion over 30 years.
Rachel Vahey, head of policy development at AJ Bell, said: “These automatic enrolment changes have been a long time coming, but this week marks a significant step on the road to improving outcomes for millions of pension savers.
“Removing the lower earnings band of £6,240 means increasing pension contributions by just under £500 a year for most automatic enrolment pension savers. This could provide a boost of over £120,000 to someone’s pension pot over the course of a 50-year career, depending on investment growth.
“The DWP now has to keep the momentum going. The next stage is to form a plan to implement these changes. This has to strike the right balance. Financial life is tough for many people right now, so changes need to be brought in at the right time and pace that supports pension savers and their employers. But the DWP cannot drop the ball, it needs to keep forging ahead as this new law will make a meaningful difference to people’s later financial lives.”
Kate Smith, head of pensions at Aegon, echoed the sentiment that the government must continue to act.
Smith commented: “Today is a momentous day in the journey of auto-enrolment and for pension savers, especially for low earners and younger workers. The next step is to implement the changes, and the expectation is that the government will consult on an implementation plan imminently. We believe this should be carried out over two to three years starting no later than April 2025 on a phased basis so that employers and employees can get used to the increased contributions. Otherwise, someone earning £12,480 would see their contributions double overnight.
“11 years after the start of auto-enrolment and almost six years on from the 2017 independent review of auto-enrolment, finally much-needed improvements will be made to auto-enrolment. But it shouldn’t stop here,” she added.
Smith said the 8% contribution level often “lures people into thinking they are saving enough” for an adequate retirement but for many this won’t be the case. Smith has called upon the government to consider increasing contributions to 12% of earnings, split equally between employers and employees, with solutions for those on the lowest income.
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