Making changes to auto-enrolment
The UK is in the midst of a quiet savings revolution. After years of declining private sector pension saving rates, the automatic enrolment programme first introduced in 2012 has the potential to transform the retirement prospects of millions of people.
According to the latest Office for National Statistics (ONS) data, the number of people actively saving in defined contribution (DC) plans – where you build up a pot of money of your own which you can convert into an income in retirement – was 6.4m in 2016, up by 62.5% from 3.9m in 2015. In fact as recently as 2012 this figure was as low as 1m.
The Government wants to go further in its efforts to turn the UK into a nation of savers and just before Christmas, it announced a series of planned changes to auto-enrolment.
SO WHAT'S CHANGING?
While auto-enrolment has clearly been successful in boosting the number of people saving for retirement, not everyone benefits.
At the moment you have to be aged 22 or older in order to qualify for auto-enrolment. However, the Government wants to extend the reforms to workers aged 18 and over.
Policymakers also plan to increase the amount going into people’s pensions through auto-enrolment. Under existing plans from 2019 all companies will pay in 3% of an employee’s earnings and the employee will pay in 4%. In addition, the employee will automatically get an extra 1% through pension tax relief.
At the moment the minimum contribution is based on a portion of your salary, referred to in the rules as ‘banded earnings’, rather than the whole lot. This means that your contributions are calculated on earnings between £5,876 and £45,000. So if you earn £27,000, for example, and your total contribution (including tax relief) is 8%, that’s 8% of £21,124 (or £1,670 a year).
This is set to change, with the Government planning to alter the rules so that every pound of salary qualifies for your auto-enrolment contribution. That said you will still need to be earning at least £10,000 in order to qualify for auto-enrolment.
Finally, the Government has pledged to test a number of ‘targeted interventions’ to encourage self-employed people to save for retirement – although it seems unlikely a mechanism will be introduced so they can get a ‘matched’ contribution in the same way employed workers do.
WHEN WILL ALL THIS HAPPEN?
While change is coming, we don’t know exactly when this will happen. The Government has only pledged to make the changes in the ‘mid-2020s’, by which time policymakers should also have reviewed – and potentially increased – the minimum contributions under auto-enrolment.
Senior Analyst, AJ Bell
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