By Dale Critchley, Workplace Policy Manager, Aviva
However, the full state pension currently pays pensioners almost half that amount at £221.20 per week, or £11,502 per year.
This suggests those currently earning the minimum should consider whether they can save something to avoid depending solely on State benefits in their retirement years.
Workplace pensions are now universally available, with anyone over 16 years old able to opt into their employer’s pension scheme. However, the legal minimum age threshold for an employer to automatically enrol an employee into their workplace pension remains at 22 years old. Over a year ago the Department for Work and Pensions (DWP) backed a private members Bill that provides them with the powers to expand auto enrolment (AE) to reduce the age limit from 22 to 18 years old and remove the lower qualifying earnings limit (LET).
Currently, many employees aged twenty-one will see their wages increase by just over 12%, but their employer pension contributions remain at zero. Unless they have done something about it themselves.
Those aged twenty-two, working full-time, and earning the National Living Wage are automatically enrolled into a workplace pension scheme and contribute £107.12 per month - of which a least £40.17 is paid by their employer. With 540 monthly pay days until the minimum retirement age of 55 years old, there is plenty of time to build up a retirement pot.
However, an additional forty-eight monthly pay days from 18 to 22 years old could add over 11% to a pension pot because those early contributions have more time to grow.
Employees earning minimum wage are also among those workers who are most impacted by the current LET which disregards the first £6,240 of pay when calculating pension contributions. It means that a full-time employee on the National Living Wage gets a minimum employer contribution of just £9.27 per week, as opposed to £12.87 if contributions were based on all earnings.
The increase in the National Living Wage and extending it to workers aged 21 and 22 years old will undoubtedly increase costs for some employers. The size of the pay increase reflects the pressure on individuals because of higher inflation.
Abolition of the LET would see pension contributions increase by a maximum of £6 per week for employees and £3.60 for employers. The cost to employers is equivalent to a 0.83% increase in the National Living Wage for a full-time employee.
It is widely acknowledged that now is not the right time to mandate increased employer and employee pension contributions.
However, it is important that a roadmap for reforming AE thresholds continues to evolve to help ensure employers and employees can plan for better retirements.
There are some big questions to be addressed such as how and when the changes can be effectively implemented to ensure a smooth transition for employers and employees.
It might be helpful if the LET is phased out over time, 3 years for example. This could allow pay increases to absorb the impact on employees, while providing employers the opportunity to manage any increased cost to their business. This is like how AE contributions were phased in.
A phased approach starting from 2026 would allow the government to meet its target of the mid 2020’s while providing employers with sufficient notice. Employees would be in receipt of pension contributions from the first pound earned in 2028/29. At this point, AE could be introduced for those aged 18 to 21 years old.
There are bound to different views and alternative solutions from across the pensions industry. And while the industry is likely to be in broad agreement with ‘not now’ to make changes, maybe ‘now’ is the time to plan for how and when to make changes.
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