The Government has recommended lowering of the auto-enrolment age threshold to 18 – setting up thousands of teenagers for a well-funded retirement. Currently the threshold for auto-enrolment is 22. Lowering age threshold would qualify nearly one million workers for auto-enrolment, resulting in an extra £770 million in annual pension savings.
There are still millions of workers who are failing to contribute sufficient amounts
Providing these individuals do not opt out of their workplace schemes, they will be beginning a multi-decade savings journey – half a century of compound interest, pound cost averaging and falling costs resulting in a tidy sum come retirement.
As well as proposing a lower age threshold for auto-enrolment, the Automatic Enrolment Review 2017 from the Department of Work & Pensions also suggested a lower earnings threshold to mean that every pound earned counts towards the contribution limit. Currently the earnings threshold is £10,000, but only £4,124 of that salary counts for the purposes of auto enrolment.
Lee Hollingworth, head of DC Consulting at Hymans Robertson, said that both the reduction of the starting age and lowering the threshold would lead to people saving more for retirement.
“Lowering the age to 18, and basing contributions from the very first pound, will significantly increase the retirement outcomes for millions of savers, through the magic of compounding,” he said.
“But it is disappointing that the changes are not expected to be implemented until the mid-2020s, which will be at a great cost to those who will benefit as they will miss out on many vital years of additional pension contribution.”
Saving More, But Not Enough
The Review found that nine million workers are now investing into a workplace pension thanks to auto-enrolment, adding to the near 11 million who were already in a workplace pension.
The report also found that while many savers – and their employers – were contributing more a month than the compulsory minimum requirement of 2% of total salary, made up of 0.8% from employee 0.2% tax back and 1% from the employer. The median employee contribution rate in 2016 was 2.4%, while employers contributed 4% on average.
“The vast majority of employers matched higher contribution rates made by their employees: in 2016, nearly 94% of automatically enrolled employees contributing over 3%, received a matching or higher employer contribution rate,” the report reads.
However, there are still millions of workers who are failing to contribute sufficient amounts to fund their retirement. The DWP warned that 12 million retirement savers were not putting enough cash into their pension.
“Based on existing automatic enrolment rules on coverage and contributions, it is estimated that the introduction of automatic enrolment reduced under-saving from 14 million to 12 million individuals,” the report states.
The increase in minimum contribution rates should go some way to fix this; from April 6 2019 the total minimum contribution will be 8% – 3% from employer and the remainder from the individual and tax back.
But Hollingworth called for an even greater minimum contribution rate to close the gap of pension poverty.
“Next year sees contributions increasing to 5% with a further increase to 8% in 2019, but there is still a long way to go,” he said. “At 12% we would begin to see a contribution that will have a meaningful impact for employees’ retirement savings. At that level we can see far greater certainty of them reaching a target income that they can live on in retirement.”
Other industry experts have suggested the proposed reforms do not go far enough, in particular they do little to address the concerns that the self-employed are falling through the retirement savings gap.
Rt Hon Frank Field MP, Chair of the Committee, said that auto-enrolment was “a bold leap” which had been “hugely successful” but more needed to be done.
“This review shows none of the boldness of the original scheme in announcing a few minor tweaks and tentative pilot schemes,” he said
“The analysis accompanying the report shows 12 million people are under-saving for retirement, including a growing army of the self-employed. It is time for the Government to revert to bold type in building on its past successes.”
