Govt delay will cost young pension savers £18,000

The Government’s delay in lowering the age limit for automatic enrolment from 22 to 18 will cost the typical school leaver around £18,000 on their pension pot, new research by Royal London revealed.

The mutual insurer highlighted that under current legislation, workers aged 22 or over and earning £10,000 per year or more have to be enrolled by their employers into a workplace pension, with employers required to contribute at least 3% of their ‘qualifying earnings’ into the pension pot.

In 2017, the Department for Work and Pensions (DWP) undertook a major review of automatic enrolment and one of its conclusions was that the lower age limit should be changed from 22 to 18. More than two years later, however, the change has yet to be made, and the DWP has suggested that nothing may happen until the ‘mid 2020s.’

Royal London believed the main barrier is HM Treasury, who are opposed to the extra cost in pension tax relief of measures to extend the scope of automatic enrolment.

Actuaries at Royal London have calculated that the typical 18-year-old will end up with a pension pot around £18,000 lower if they do not start pension saving until they reach 22, suggesting this didn’t just reflect the loss of an employer contribution for four years or the loss of tax relief on contributions, but also the loss of investment growth on money invested between age 18 and 22.

Royal London director of policy, Steve Webb, commented: “Pretty much everyone agrees that enrolling people into a pension as soon as they start work makes sense. It reinforces the message that saving in a pension is the norm when you have a job, and it also reinforces the message that you should start saving as soon as you can.

“Even employers are generally positive, preferring to have a single system for all of their workforce rather than a complex set of exemptions and rules about communicating with the under-22s. But typical Treasury intransigence means that this sensible proposal – endorsed by another government department – is now in limbo.

“Meanwhile, hundreds of thousands more younger workers will miss out on a valuable leg-up towards their long-term savings goals. It is time that Treasury and DWP sat down together and agreed a timetable to implement this overdue change.”

Commenting on the findings from Royal London, Altus head of retirement strategy, Jon Dean, suggested the industry should be better at persuading employers to ‘go above and beyond’ the legal minimum pension provision.

“Latest unemployment rates of 3.8% suggest a tight labour market, and in such circumstances, total rewards become increasingly important in attracting and retaining talent,” Dean added.

“The Pensions Act 2008 does not appear to forbid employers from auto-enrolling all their workers in a pension scheme, only sets out their obligations to enrol those in the right age and earnings brackets. The early years of investing are arguably the most important, as they typically occur when workers have few to no family obligations, and any money saved will have 50 years or so to compound.

“Of course, there will be those employers – perhaps especially in high-unemployment areas – for whom attracting staff is not seen as challenging. Here, where minimising costs is the principal driver to offering only statutory minimum pay and benefits.

“In addition, for workers on the Government-promoted apprenticeship scheme, an 18-year-old on minimum wage of £4.15/hr may be earning less than half the average £15,200 a year for this age group and would not qualify for a pension even with a reduced age threshold. It is these lowest-paid individuals who will continue to lose out.”

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