Chapters Financial News

Automatic enrolment – the legal requirement for an employer to enrol all eligible workers into a workplace pension and contribute to it – is one of the biggest changes in pensions legislation in recent times. The initiative has proved to be a great success with around 22.6 million people with savings in a workplace pension in April 2021. Invariably pensions need two things, namely money and time. Adding in as much as you can, as early as you can is normally beneficial, irrespective of whether you plan to retire in 40 years' time or 4 months' time.

October 2022 marked a decade since the first employees in the UK were automatically enrolled into workplace pension schemes. Large employers (with 250 or more workers) were required to start automatically enrolling their workers from October 2012, with other smaller organisations following in stages over subsequent years. Now, auto-enrolment rules apply to all employers, no matter how small.

What has changed over time?

The main change over time has been the level of minimum contributions required. These have increased from 2% gross pa of qualifying earnings to the current minimum of 8% gross pa of qualifying earnings – currently those earnings between £6,240 and £50,270 gross pa. Of this, the employer must pay a minimum of 3% gross pa.

Other than some fairly minor changes to the lower and upper levels of qualifying earnings, and the earnings 'trigger' for auto-enrolment over time, the most significant change has been in the minimum contribution levels.

However, this may be about to change.

What new changes are on the cards?

At the moment, the minimum age for auto-enrolment is 22, and the earnings 'trigger' for enrolment is £10,000 gross pa. If a worker satisfies these conditions, and are under State Pension age, they qualify for auto-enrolment.

However, a bill which is currently making its way through the House of Lords would extend auto-enrolment to those aged 18 and over and would also abolish the lower earnings limit for contributions.

What difference would these changes make to employers and employees?

Clearly, contribution cost is a key point here. For employers, if these changes passed into law, two things would happen.

Firstly, more staff members would become eligible for auto-enrolment, through the reduction in the age limit and the removal of the lower earnings limit.

Secondly, for all existing and future members of a workplace pension scheme, contributions would be based on all earnings, to a maximum of £50,270 gross pa, using the current upper limit. That's an additional £6,240 gross pa per individual to take into account, and at the minimum contribution level for an employer of 3% gross pa would amount to a further £187.20 gross pa in contributions. A small amount, maybe, on an individual basis, but it could be a significant increase to an employer's workplace pension budget across the whole team.

For employees, the same applies, as more individuals would become eligible for auto-enrolment and more of their earnings would be taken into account in calculating their own contributions.

Summary

Encouraging as many people as possible to start saving for their retirement as early as possible is important and any changes that move this forward are to be welcomed. As suggested earlier, pensions usually only need two things – money and time – and the State Pension alone will not normally provide sufficient income for a comfortable retirement. The potential for more to go into your pension is usually a good thing, if affordable. However, check your overall pension position (State pension / old employers' plans / current employer's arrangements) to ensure you are on track for your future needs.

No individual advice is provided during the course of this blog.

Keith Churchouse FPFS
Director
CFP Chartered FCSI
Chartered Financial Planner

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