MARTIN Lewis has revealed how any adult worker can get a “hidden pay rise” worth hundreds of thousands of pounds.
It comes as the government has the power to lower the age limit to be automatically enrolled into workplace pensions from 22 to 18.
AlamyMartin Lewis’ MoneySavingExpert.com team have explained how proposed workplace pension rules will benefit young workers[/caption]
The MSE Team said: “A new piece of legislation called the Pensions (Extension of Automatic Enrolment) Act 2023 has been given the seal of approval to become law by getting what’s called ‘Royal Assent’.”
The proposed changes to the rules would lower the age at which people are automatically placed in a workplace pension to 18, rather than 22.
It will also axe the lower earner’s limit (LEL) and see a worker on any amount of income be able to save – as it stands a person has to earn at least £6,240 to be able to contribute to their workplace pension.
But the MSE Team said: “There’s no immediate change. The Government now needs to consult on how and when these powers could be used.”
Experts at Interactive Investor (ii) have already crunched the numbers and found the changes could give workers a hefty payout if they pass into law.
Someone earning £20,000 at age 18 and paying into their pension until they reach age 66, could get a retirement boost of £159,000 from the changes.
That’s up from £187,000 with the LEL and only starting saving at 22, to £346,000 with no LEL and starting saving at 18.
Whereas a worker earning £30,000 at 18 and contributing to a pension until they’re 66, could get a retirement boost of £199,000.
This is an increase from £321,000 with the £6,240 limit from age 22, to £520,000 starting when they turn 18 with no LEL.
These workings are assuming the standard 5% investment performance net of fees, contributions from age 18 or age 22, as well as 5% employee and 3% employer contributions, and a 2% annual increase in contributions.
Currently, employers must automatically enrol workers into a pension scheme and make contributions if they are aged between 22 and the state pension age and earn at least £10,000 a year.
As it stands, workers can still opt into their work’s pension scheme at 18 but it isn’t automatic.
The LEL, of £6,240, is the minimum level of an enrolled worker’s earnings on which they and their employer have to pay contributions.
It’s hoped that the lower earnings limit could help to bring more lower earners and people working part-time jobs into automatic enrolment.
What is auto-enrolment?
Auto-enrolment is when you’re automatically placed into your workplace pension scheme, with your contribution deducted from your pay packet.
Bosses have had to automatically enrol staff into pension schemes since October 2012 to get workers saving for their golden years.
The only exception is if you’re under the age of 22 or earn under £10,000, in which case you have to ask to opt in.
A minimum of 8% must be paid into the pension, with you contributing 5% and your employer paying at least 3%.
Crucially, the contribution you make as an employee is deducted before tax – so the actual amount you’re putting away is less than it sounds.
For example, if you pay 20% tax on your earnings, and your pension contribution is £100, this only really costs you £80 as this is how much that amount would have been worth after tax.
While opting out of a workplace pension would increase your monthly salary, it’s best to only do this as a last resort, as you’ll have less in later life.